MED, NIT Calicut

January 2015

Performance analysis of a four-echelon supply chain under order up to

level inventory policy using SCIPA software package
1. Aim
To evaluate the performance of a four-echelon supply chain when supply chain members use
P-system (order up-to level) of inventory control and proportionate allocation rule.

Supply Chain structure

2. Order Up-To Level (OUL) Inventory Policy

In this policy, an order is placed at each review period so that the sum of the inventory
position (IP) and the order placed in that period must be equal to the maximum inventory
level (order up-to level), S . Maximum inventory level is the demand planned for some time
periods, which includes time between reviews, the number of time periods required for the
order to reach the upstream echelon (In the case of factory, this is the time required to issue
the production order.) and the number of time periods required for the shipment quantity to
reach the downstream echelon. (In the case of factory, it is the time required to manufacture
the goods.).

i, j
i, j
0,
if IP
S

t
t

i, j
O

t
S i, j IPi, j , if IPi, j S i, j
t
t
t
t

Supply chain stage index

Supply chain member index

j
t
IPt

i, j

Time period index

Inventory position of member j in stage i at period t

S ti , j

Order-up-to level of member j in stage i at period t

Oti , j

Size of an order placed by member j in stage i at period t

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MED, NIT Calicut

January 2015

3. Rationing Rules
If sufficient inventory is not available, a member in the upper echelon will follow some rules
to ration the available inventory among two associated downstream members in the lower
echelon. Here the supply chain is analysed under proportional allocation rule.
3.1 Proportional Allocation Rule (PAR)
The rule works as follows: At time period t if beginning inventory at a member of (i +1)th
echelon is ample, then the orders of two downstream members in the ith echelon will be
satisfied. Otherwise, members in the (i +1)th echelon allocates its inventory to associated
downstream members in the ith echelon according to the proportion of order size to the total
order quantity. The application of this rule for the allocated quantity calculation from W 2,1 to
R1,1 and R1,2 for the supply chain:
AQt( 2,1), (1,1)

Ot1,1k

AS t2,1 Ot1,1k
O1,1 O1, 2
t k
t k

if

ASt2,1 (Ot1,1k Ot1, 2k )

if

ASt2,1 (Ot1,1k Ot1, 2k )

and

AQ

where,

( 2 ,1), (1, 2 )
t

1, 2

Ot k
2,1
( 2 ,1), (1,1)

AS t AQt

if

ASt2,1 (Ot1,1k Ot1, 2k )

if

ASt2,1 (Ot1,1k Ot1, 2k ) )

indicates that round X to the next highest integer,

AQt(2,1), (1,1) and AQt(2,1), (1,2) represents the quantity allocated from W2,1 to R1,1 and
respectively at period t.

R1,2,

4. Performance Measures
4.1 Fill Rate (FR)
It is defined as a fraction of demand met from the shelf in the lost sale environment. The
average of FRs of all the retailers is considered as supply chain FR.
N
SQti 1, j

1 m t
n 1
SC fill rate i 1
N

m
j 1
Dt
t n 1
i 1

mi

SQti , j

Number of members in stage i

Number of time periods considered as warm up period in simulation
Number of time periods considered for simulation
Quantity shipped by member j in stage i at period t

Dt

Customer demand at time period t

n
N

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MED, NIT Calicut

January 2015

4.2 Ratio of order variance of echelon i (i)

As moving from downstream echelon to upstream echelon, the amplification of order
variance shows the presence of BWE in supply chains. All the customer demands are
assumed to be independent and that each member places orders independently, the aggregate
variance in each echelon i is the sum of the variances of orders of each member j in the
echelon i. The formula for i is given below:
ni

s
i

j 1
nC

2
Oi , j

s
j 1

2
OCj

sO2i , j - Variances of orders of each member j in echelon i

sO2Cj - Variances of orders placed by customer

4.3 Bullwhip slope (BwSl)
gives a measure of increase in order variance between a specific echelon i and customers
and it is not a representative of entire chain. BwSl is an entire supply chain measure showing
the presents of BWE. A high value of the slope means a fast propagation of the BWE through
the supply chain, while a low value means a smooth propagation. It is calculated by using the
formula given below:
N

N
BwSl

pi i

i 1

i 1

pi

i 1

pi2

i 1
2

pi

i 1

N - Number of echelons
pi - Position of ith echelon
i - Ratio of order variance between echelon i and customer

4.4 Total cost of supply chain (TCSC)

Total cost of an echelon is the sum of all costs of all members in the cost computation
periods. Various costs considered are ordering cost, transportation cost, holding cost and
shortage cost. Total supply chain cost is the sum of all cost of all echelons.
4

TCSC
i 1

m
3 m
(TIHC i , j TLSC i , j TOC i , j ) TTC i , j
j 1
i 1 j 1

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MED, NIT Calicut

January 2015

TIHCi , j

where,

EI
N

t n 1

TLSC

i, j

LSQ
N

t n 1

i, j
t

i, j
t

hi, j

LSC i , j

TOCi , j Number of orders placed by member j in stage i OC i , j

TTC i , j Number of shipments received by member j in stage i TC i , j

5. Result
1. Fill rate (average)
a. Retailers =
b. Wholesalers =
c. Distributors =
d. Factory =
2. Ratio of order variance of echelon i (i)
a. Retailers =
b. Wholesalers =
c. Distributors =
d. Factory =
3. Bullwhip slope (BwSl) =
4. Total cost of supply chain (TCSC) =
5. Paste all graphs (Fill rate, Zero replenishment phenomenon, Inventory
variance and Order rate variance)

6. Inference

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MED, NIT Calicut

January 2015

Input settings for inventory policy analysis using SCIPA software

1. Echelon details
a. Retailers 8
b. Wholesalers 4
c. Distributors -2
d. Factory 1
2. Environment Lost sales
3. Periodic nature Week
4. Information sharing No sharing
5. Forecast
a. Period of moving average (weeks)
Retailers 4, Wholesalers 4, Distributors - 4, Factory - 4
b. First period demand
Retailers 40, Wholesalers 0, Distributors - 0, Factory -0
6. Customer demand distribution
a. Type Normal
b. Parameters Mean = 40, Standard deviation = 5
7. Lead time (weeks)
Order
R to W
W to D
D to F
F to P

2
2
2
1

Delivery
W to R
2
D to W
2
F to D
2
P to F
2

8. Members details
a. Inventory policy OUL (for all members)
b. Review period -1 week (for all members)
c. Initial inventory
Retailers 160, Wholesalers -320, Distributors 640, Factory -960
d. Rationing policy Proportional Allocation Rule (PAR) (for all members)
e. Ordering cost
Retailers 5, Wholesalers -5, Distributors 7, Factory -7
f. Transport cost
Retailers 200, Wholesalers -250, Distributors 180, Factory 0
g. Holding cost
Retailers 1, Wholesalers -0.8, Distributors 0.7, Factory 0.5
h. Shortage cost
Retailers 5, Wholesalers -4, Distributors 3, Factory 2
9. Simulation parameters
a. Length 104 weeks
b. Replication - 1
10. Evaluation period
a. Beginning 53
b. Ending - 104
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