Stockout propagation and amplification in supply chain inventory systems

We investigate the existence and magnitude of stockout propagation and stockout amplification in the context of supply chain inventory systems. Stockout amplification is a stage-to-stage increase in overall stockout rates. Stockout propagation is the tendency for stockout at one node to instigate a stockout at a neighbouring node and is conceptually related to the idea of cascading failures in physical systems, such as electrical power grids. We study these concepts in both upstream (‘supply side’) and downstream (‘demand side’) directions in the context of normal operating conditions for an adaptive R, S (periodic, order-up-to) inventory policy. We build a simulation model of a 5-stage serial supply chain that experiences normally distributed customer demands and gamma distributed lead times. We find that stockout propagation exists, but contrary to conventional wisdom, it occurs in the upstream direction. There is little indication that stockout propagation is occurring to any significant degree in the downstream direction. We also find stockout amplification occurring in the upstream direction in scenarios where more aggressively adaptive inventory parameter updating is performed. We discuss implications of this work in the areas of supply chain inventory modelling, ordering decisions, safety stock determination, and the use of adaptive inventory policies.