Optimal Ordering Policies for Multi-Echelon Supply Networks

TL;DR

This paper develops an optimal ordering policy for multi-echelon supply networks using stochastic control, providing a closed-form solution and testing its robustness through simulations with demand and supply shocks.

Contribution

It introduces a closed-form optimal ordering policy for multi-echelon supply chains and demonstrates its effectiveness and robustness through simulation on a real-world network.

Findings

The policy performs well under ideal demand conditions.

It remains robust under demand-side shocks.

It maintains supply chain stability during production halts.

Abstract

In this paper, we formulate an optimal ordering policy as a stochastic control problem where each firm decides the amount of input goods to order from their upstream suppliers based on the current inventory level of its output good. For this purpose, we provide a closed-form solution for the optimal request of the raw materials for given a fixed production policy. We implement the proposed policy on a 15-firm acyclic network based on a real product supply chain. We first simulate ideal demand situations, and then we implement demand-side shocks (i.e., demand levels outside of those considered in the policy formulation) and supply-side shocks (i.e., halts in production for some suppliers) to evaluate the robustness of the proposed policies.