The order-up-to policy found to create chaos in supply chains

Together with my co-author Xun Wang, I have been investigating the dynamic response of the order-up-to (OUT) replenishment policy. This is the algorithm used in many ERP/MRP systems to make replenishment orders. We found when the OUT policy is operating in a linear mode (without hitting a production capacity or inventory storage constraint, or when unmet demand is backlogged rather than lost), the policy is stable and does not generate chaotic responses. However, if a non-linear operation exists (i.e. you hit a capacity or inventory contrainst, or unmet demand is lost), then the OUT policy creates chaotic behaviour outside of the system’s stablity boundary. If lead-time information in your ERP/MRP system is set up correctly, this is not too much of a problem as the OUT policy is then stable. However, if the lead-time information in you ERP/MRP system is incorrect (i.e. different to the real lead-time), then the OUT policy is unstable and is creating chaos in your supply chain. Here you find a short, easy to read, research summary of our work. The full research was written up in the following journal articles: Stability analysis of constrained inventory systems with transportation delay and Exploring the oscillatory dynamics of a forbidden returns inventory system.