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The Stabilizing Effect of Inventory in Supply Chains

Author

Listed:
  • Manuel P. Baganha

    (Universidade Nova de Lisboa, Lisbon, Portugal)

  • Morris A. Cohen

    (University of Pennsylvania, Philadelphia, Pennsylvania)

Abstract

This paper presents a hierarchical model framework for the analysis of the stabilizing effect of inventories in multiechelon manufacturing/distribution supply chains. This framework is used to compare the variance of demand to the variance of replenishment orders at different echelons of the system (e.g., retailer, wholesaler). Empirical data and experience with management games suggest that, in most industries, inventory management policies can have a destabilizing effect by increasing the volatility of demand as it passes up through the chain (the “bullwhip” effect). Our model helps to explain these observations and indicates mechanisms that can promote stabilization. The analysis results also define sufficient conditions for the existence of stabilization and relate these conditions to the optimality of myopic control policies.

Suggested Citation

  • Manuel P. Baganha & Morris A. Cohen, 1998. "The Stabilizing Effect of Inventory in Supply Chains," Operations Research, INFORMS, vol. 46(3-supplem), pages 72-83, June.
    • Handle: RePEc:inm:oropre:v:46:y:1998:i:3-supplement-3:p:s72-s83
    DOI: 10.1287/opre.46.3.S72
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    References listed on IDEAS

    as
    1. Blanchard, Olivier J, 1983. "The Production and Inventory Behavior of the American Automobile Industry," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 365-400, June.
    2. Morris A. Cohen & Paul R. Kleindorfer & Hau L. Lee, 1988. "Service Constrained (s, S) Inventory Systems with Priority Demand Classes and Lost Sales," Management Science, INFORMS, vol. 34(4), pages 482-499, April.
    3. West, Kenneth D., 1983. "A note on the econometric use of constant dollar inventory series," Economics Letters, Elsevier, vol. 13(4), pages 337-341.
    4. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November.
    5. Charles C. Holt & Franco Modigliani & John P. Shelton, 1968. "The Transmission of Demand Fluctuations Through a Distribution and Production System, the Tv-Set Industry," Canadian Journal of Economics, Canadian Economics Association, vol. 1(4), pages 718-739, November.
    6. Morris A. Cohen & Hau L. Lee, 1988. "Strategic Analysis of Integrated Production-Distribution Systems: Models and Methods," Operations Research, INFORMS, vol. 36(2), pages 216-228, April.
    Full references (including those not matched with items on IDEAS)

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