Controlling bullwhip and inventory variability with the golden smoothing rule
Abstract
A major cause of supply chain deficiencies is the bullwhip effect. Supply chain managers experience this variance amplification in both inventory levels and replenishment orders. In this paper, we analyse a major cause of the bullwhip effect, namely the classical Order-Up-To policy and suggest a remedy (a smoothing replenishment rule). In general, dampening variability in orders may have a negative impact on customer service due to increase in inventory variance. We quantify the variance of the Net Stock levels and compute the required safety stock as a function of the smoothing required. The contribution of this paper is the analysis of the trade-off between bullwhip and inventory variance resulting in a golden smoothing rule. The golden smoothing rule refers to the fact that the values of two proportional feedback controllers are set equal to the Golden Ratio.