Strategic Inventory Placement in Supply Chains : Non - Stationary Demand Stephen

The life cycle of new products is becoming shorter and shorter in all markets. For electronic products, life cycles are measured in units of months, with six to twelve-month life cycles being common. Given these short product life-cycles, product demand is increasingly difficult to forecast. Furthermore, demand is never really stationary as the demand rate evolves over the life of the product. In this paper we consider the problem of where in a supply chain to place strategic safety stocks to provide a high level of service to the final customer with minimum cost. We extend a model that we have developed for stationary demand to the case of non-stationary demand, as might occur for products with short life cycles. Key assumptions are that we can model the supply chain as a network, that each stage in the supply chain operates with a periodic–review base-stock policy, that demand is bounded and that there is a guaranteed service time between every stage and its customers. To model the non-stationary demand, we divide the product life cycle into time phases, where we assume that the demand process is stationary within each time phase. However, the parameters for the demand process will vary from phase to phase. We first establish conditions for which the placement of safety stocks is the same within each phase. As a consequence, the optimization algorithm for the case of stationary demand extends directly to determining the safety stocks within each phase. We then examine what happens to the optimal safety stock policy in the transition from one phase to the next. We provide empirical evidence, as well as a heuristic argument, for a policy that maintains the same safety stock locations through the transition between time phases. We conclude with an illustrative example that demonstrates the proposed solution and how it would be deployed. 1. Introduction Manufacturing firms are introducing new products at a higher frequency, and these products are on the market for increasingly shorter amounts of time. For each new product introduction, a firm must determine its supply chain and the associated operating policies in