The impact of endogenous demand on push-pull production systems

Though often analyzed separately, supply chain instability and customer demand interact through product availability. We investigate the feedback between supply chain performance and demand variability in a model grounded in a first-hand study of the hybrid push-pull production system used by a major semiconductor manufacturer. While customers' response to variable service levels represents an important concern in industry, with sizeable impacts on company profitability, previous models exploring supply chain instability do not account for it. This research incorporates two effects of customer responses to availability. The soles effect captures the negative feedback whereby product shortages cause customers to seek alternative sources of supply, reducing demand and easing the shortage. The production effect captures the delayed impact of changes in demand on the manufacturer's production decisions: lower demand leads to reduced production, prolonging shortages that depress demand, a destabilizing positive feedback. We show how the soles and production effects interact to destabilize the supply chain and lower average performance. Supply chain models that assume exogenous demand may therefore underestimate the amplification in the chain and the Value of inventory buffers. In addition, incorporating the customer response leads to different inventory and utilization policies from those in use by the company. The model yields insights into the costs of lean inventory and responsive utilization policies in the context of hybrid production systems and endogenous demand. Copyright (c) 2005 John Wiley & Sons, Ltd.