A simple approach for assessing the cost of system nervousness Huseyin Tunc a , Onur A. Kilic b , S. Armagan Tarim b , Burak Eksioglu a,n a Department of Industrial and Systems Engineering, Mississippi State University, P.O. Box 9542, Mississippi State, MS 39762, USA b Department of Management, Hacettepe University, 06800 Beytepe, Ankara, Turkey article info Article history: Received 23 January 2012 Accepted 14 September 2012 Available online 9 October 2012 Keywords: Setup-oriented nervousness Quantity-oriented nervousness Static uncertainty Dynamic uncertainty Static–dynamic uncertainty Non-stationary stochastic demand abstract A well-known problem in coordinating supply chain inventories is that replenishment decisions are revised due to stochastic demands. This issue is often referred to as system nervousness. The literature distinguishes between two types of nervousness: setup-oriented and quantity-oriented. It is widely accepted that cost of nervousness is difficult to measure. We argue that this cost can be evaluated by means of three well-established inventory control strategies: static uncertainty, dynamic uncertainty, and static-dynamic uncertainty. These strategies reflect extreme cases with regard to the setup- and the quantity-oriented nervousness, and provide a simple yet an objective measure to assess the cost of system nervousness. Our results are of practical importance. We highlight that the setup-oriented nervousness, which is considered to be the most critical in practice, can be eliminated with a minor cost penalty. This is, however, not the case for the quantity-oriented nervousness. & 2012 Elsevier B.V. All rights reserved. 1. Introduction Inventory control is far more challenging when demand is stochastic. The difficulty mainly springs from the fact that, under uncertainty, effective inventory control policies are needed to steer the inventory systems and efficient algorithms to com- pute policy parameters. A further complication with stochastic demands, particularly in supply chain networks and MRP envir- onments, is that downstream players continually change the timing as well as the size of their replenishments. This issue is often referred to as the system nervousness, and regarded as an important performance measure for inventory control policies (De Kok and Inderfurth, 1997). The system nervousness arise due to revisions in the original plan which in turn result in different replenishment decisions in successive planning cycles. For example, a previously planned order may be revised or canceled following demand realizations in a particular period. The system nervousness leads to a lack of coordination in supply chains and MRP environments because nervousness on the top level propagates throughout the system (see e.g. De Kok and Inderfurth, 1997; Chatfield et al., 2004; Kaipia et al., 2006). The system nervousness is critical especially in systems characterized by low degrees of flexibility. In such environments, the cost of implementing revisions in replenishment schedules/quantities may overcome the advantage of employing a cost efficient control policy (Heisig, 2001). The literature distinguish between two types of system nervous- ness: setup-oriented and quantity-oriented. The former refers to revisions in replenishment schedules, whereas the latter refers to revisions in replenishment quantities. As mentioned by many authors (see e.g. Inderfurth, 1994; Heisig, 2001; Tarim and Kingsman, 2004) the setup-oriented nervousness is consid- ered to be more critical as compared to the quantity-oriented nervousness. The nervousness syndrome has received only limited scientific attention in the literature. Most of the earlier studies on the subject employed simulation approaches in order to investigate the impact of different parameters on system nervousness (see e.g. Blackburn et al., 1986, 1987; Sridharan et al., 1988; Kadipasaoglu and Sridharan, 1997). More recent studies provided guidelines to assess the extent of system nervousness of different inventory policies (see e.g. Jensen, 1996; De Kok and Inderfurth, 1997; Heisig, 1998, 2001; Kilic and Tarim, 2011). These papers consider nervousness as an independent attribute of an inventory system and propose measures to assess the instability of asso- ciated inventory control systems. There have also been a few studies where system nervousness is incorporated to the total cost function by a given cost parameter (see e.g. Kropp et al., 1983; Kropp and Carlson, 1984). However, most of these works mentioned above are directed towards stationary systems and their results do not carry over to non-stationary demand environments. It is important to underline that non-stationary demands are very common in practice due to fast technological progress, changes in consumer Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/ijpe Int. J. Production Economics 0925-5273/$ - see front matter & 2012 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.ijpe.2012.09.022 n Corresponding author. Tel.: þ1 662 325 7625; fax: þ1 662 325 7618. E-mail addresses: ht100@msstate.edu (H. Tunc), onuralp@hacettepe.edu.tr (O.A. Kilic), armagan.tarim@hacettepe.edu.tr (S.A. Tarim), beksioglu@ise.msstate.edu (B. Eksioglu). Int. J. Production Economics 141 (2013) 619–625