Hindawi Publishing Corporation Modelling and Simulation in Engineering Volume 2013, Article ID 421350, 14 pages http://dx.doi.org/10.1155/2013/421350 Research Article Control Theory Concepts Applied to Retail Supply Chain: A System Dynamics Modeling Environment Study Balaji Janamanchi 1 and James R. Burns 2 1 Division of International Business and Technology Studies, Texas A&M International University, 5201 University Blvd, Laredo, TX 78041-1900, USA 2 Rawls College of Business Administration, Texas Tech University, ISQS Area, P.O. Box 42101, Lubbock, TX 79409-2101, USA Correspondence should be addressed to Balaji Janamanchi; bjanamanchi@tamiu.edu Received 21 May 2013; Accepted 5 September 2013 Academic Editor: Jing-song Hong Copyright © 2013 B. Janamanchi and J. R. Burns. Tis is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Control theory concepts have been long used to successfully manage and optimize complex systems. Using system dynamics (SD) modeling methodology, which is continuous deterministic simulation modeling methodology, we apply control theory concepts to develop a suitable performance functional (or objective function) that optimizes the performance of a retail supply chain. Te focus is to develop insights for inventory management to prevent stock-outs and unflled orders and to fll customer orders at the lowest possible cost to supply chain partners under diferent scenarios, in a two-player supplier-retailer supply chain. Moderate levels of inventory, defning appropriate performance functional, appear to be crucial in choosing the right policies for managing retail supply chain systems. Te study also demonstrated how multiple objectives can be combined in a single performance functional (or objective function) by carefully assigning suitable weights to the components of objectives based on their priority and the existence of possible trade of opportunities. 1. Introduction Tere is no denying that supply chains are complex business systems and the more we know about them the better we can manage them. In this paper we focus on retailer supply chains, rather than manufacturer supply chains. Additionally, we demonstrate the use of control theory concepts to optimize the performance of the retail supply chain for predefned performance functional. One signifcant diference between manufacturers and retailers is that retailers do not have a manufacturing delay. However, both manufacturer and retailer have one week lead time delay. When the retailer transmits an order, one week is required to fll and ship the order; likewise when a manufacturer transmits a shop order to produce a product, one week is required to manufacture the product. Once the product is shipped, it is in-house at a retailer’s facility and is available for sale. Structurally, this is signifcant. Te structural model used for retailers does not include the manufacturing delay found in man- ufacturing models, typically known as cycle time. Further, the goals and objectives of retailers are diferent from those of manufacturers. Manufacturing supply chains are focused on minimizing a bullwhip efect, while retailers are more interested in minimizing unflled order costs and inventory- carrying costs. Tis is the fabric, the substance, this paper will address—the supply-chain needs of retailers accomplished via a control theory optimization process. Tis study is part of a series of studies aimed at gaining a deeper and better understanding of supply chain dynamics using system dynamics modeling methodology developed and enhanced over the past ffy years [1, 2]. In prior studies efects of reduction in information delays and fow delays, as well as forecasting/smoothing, upon manufacturing supply chains have been explored [3, 4]. Te focus of our current study is to develop useful insights for inventory management to prevent stock-outs and unflled orders under diferent scenarios, exclusively for retailers in a two-player supplier- retailer supply chain. Afer all, the success of the supply chain lies in meeting customer orders in a timely manner at