Analysing the effects of serially-correlated demands on costs and service levels: a lost-sale case inventory system
by Rafael Diaz; Joshua G. Behr
International Journal of Applied Management Science (IJAMS), Vol. 6, No. 4, 2014

Abstract: This paper studies a stochastic inventory system exposed to demands that exhibit serial-correlation components. The relationship between different levels of serial-correlation and inventory cost components as well as reorder points and order quantities are analysed in this study. Understanding these relationships provides opportunities for managers to leverage logistic and cross-functional supply chain levers which may be used to inform managerial risk mitigation plans. We consider a lost-sale inventory system with continuous monitoring while applying an enhanced version of simulated annealing that incorporates pattern search, ranking and selection to generate sub-optimal solutions to this problem. We employ an experimental design methodology to quantify the magnitude and significance of main effects and interactions. The analysis of the variance demonstrates that holding costs and the order quantity become substantial and significant as the auto-correlation increases in the studied setting. Total costs and service levels are compared between solutions that ignore autocorrelation factors and those that account for these dependencies.

Online publication date: Sat, 07-Feb-2015

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