Inventory Replenishment Decisions Under Continuous Review System

Inventory managers mostly do not follow normative optimization models. At best they introduce a level of bounded rationality instead of full rationality in their inventory replenishment decisions. In this paper, we examine the behavior of inventory managers in a continuous review system within a decentralized supply chain. We implement an experimental approach with unknown market demand and local information availability. The analysis reveals that not only the magnitude and the variability of order quantity tend to be larger, but also the order time intervals is lengthen and highly variable while moving upstream along the supply chain. We also investigate how the inventory managers’ replenishment decisions influence echelons holding, backorder, and total costs. Results show that the large order quantities and long order time intervals induced by the inventory managers increase their holding and backorder costs in the upstream supply chain. Results also suggest that reduction in the variability of customer order quantity significantly decreases the upstream supplier total cost.