Order-up-to-level policy update procedure for a supply chain subject to market demand uncertainty

- We propose a new dynamic order policy for a supply chain with uncertainty in demand.
- Inventory consumption occurs at random time intervals and demand a random quantity of items.
- The new order policy avoids propagation of uncertainty through SC levels.
- This policy mitigates the bullwhip effect, minimizes stockout, and increases the customer service level.

The planning of a supply chain (SC) subject to market demand uncertainty is challenging in regards to defining update mechanisms that deal with demand variations. This study addresses this challenge and proposes a new reorder point update procedure for order-up-to-level (OUTL) policies in continuous review systems. The new procedure modifies the classical OUTL policy by introducing absorption inventory, a concept that changes reorder points and lot sizes according to demand variations. Results obtained through a discrete event simulation based on real-world data provided by a Brazilian company show that the proposed order policy provides better performance, particularly in terms of bullwhip effect reduction and improved service level.