A Discrete Transfer Function Model

International Journal of Production Research
ISSN: 0020-7543 (Print) 1366-588X (Online) Journal homepage: http://www.tandfonline.com/loi/tprs20
A discrete transfer function model to determine

the dynamic stability of a vendor managed
inventory supply chain
S. M. Disney & D. R. Towill
To cite this article: S. M. Disney & D. R. Towill (2002) A discrete transfer function model to
determine the dynamic stability of a vendor managed inventory supply chain, International
Journal of Production Research, 40:1, 179-204, DOI: 10.1080/00207540110072975
To link to this article: http://dx.doi.org/10.1080/00207540110072975
Published online: 14 Nov 2010.
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int. j. prod. res., 2002, vol. 40, no. 1, 179 204
A discrete transfer function model to determine the dynamic stability of a

vendor managed inventory supply chain
Downloaded by [IIT Indian Institute of Technology - Mumbai] at 22:22 29 September 2015
S. M. DISNEYy* and D. R. TOWILLy

This paper considers a well-established production and distribution scheduling
algorithm, called the Automatic Pipeline, Inventory and Order Based Production
Control System (APIOBPCS) within a Vendor Managed Inventory (VMI) supply
chain. It develops a transfer function model of the system using causal loop
diagrams, block diagrams, di erence equations and z-transforms. Important
insights into the VMI supply chain are derived from the mathematical model
pertaining to the stability and robustness of the VMI system. Analysis conrmed
by dynamic simulation clearly demonstrates instability arising from poor design.
We also demonstrate its avoidance via our recommended parameter settings for
tuning the two feedback loops within the supply chain for a specic production
delay. The procedure is readily extended for other production delays and distributions.
1. Nomenclature
General terms
Az
APIOBPCS
CSL
C!
D
EPOS
f t
F z
IOBPCS
Pz
Qz
T
VMI
VMI-APIOBPCS
!
xt
average consumption z-transfor m transfer function,

Automatic Pipeline, Inventory and Order Based
Production Control System,
Customer Service Levels,
characteristic equation of the system in the !-domain,
delay,
Electronic Point of Sale,
system response at time t,
system z-transform transfer function,
Inventory and Order Based Production Control System,
z-transform of the production lead-time,
distributor z-transform transfer function,
time period,
Vendor Managed Inventory,
Vendor Managed Inventory, Automatic Pipeline,
Inventory and Order Based Production Control System,
Tustin operator,
system response at time t to input at time t,
Revision received May 2001.

{ Logistics Systems Dynamics Group, Cardi Business School, Cardi University,
Aberconway Building, Colum Drive, Cardi CF10 3EU, UK.
* To whom correspondence should be addressed. e-mail: DisneySM@cardi .ac.uk
International Journal of Production Research ISSN 00207543 print/ISSN 1366588X online # 2002 Taylor & Francis Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/00207540110072975
S. M. Disney and D. R. Towill
180
X z
Z
VMI-APIOBPCS terms
AINV
AVCON
COMRATE
CONS
DES
DINV
dSS
DWIP
EINV
EWIP
FINV
G
GIT
O
ORATE
R
T
Ta
T p
Ti
TINV
Tp
Tq
Tw
VCON
WIP
2.
system z-transform transfer function multiplied by the

input z-transform transfer function,
z-transform operator.
Actual INVentory,
1=1 Ta,
average virtual consumption,
1=1 Tq,
completion rate,
consumption or market demand,
dispatches,
distributors inventory holding,
incremental change in the re-order point, R,
Desired Work In Progress,
Error in Inventory Holding,
Error in Work In Progress,
factory inventory,
gain (distributors re-order point/average consumption),
Goods In Transit,
order-up-to-point,
production order rate,
re-order point,
transport quantity,
consumption averaging time constant,
estimate of the production lead-time,
inverse of inventory based production control law gain,
target system inventory holding,
the production lead-time in units of sampling intervals,
exponential smoothing constant used at the distributor to
set R,
inverse of WIP based production control law gain,
virtual consumption,
Work In Progress.
Introduction
This paper is concerned with the analysis of a Vendor Managed Inventory (VMI)
supply chain. We focus on a one supplier, one customer relationship where the
demand levels are deemed to change signicantly over time, paying particular attention to the manufacturers production scheduling activities. A VMI system is a
production and inventory control strategy where stock positions are known throughout the supply chain for the purposes of setting production and distribution targets.
The z-transform is used to investigate the performance of the VMI system when
coupled with the APIOBPCS (Automatic Pipeline, Inventory and Order Based
Production Control System) production scheduling system (John et al. 1994). This
paper may be regarded as generalizing the approach of Popplewell and Bonney
(1987) and extending it to a two-echelon VMI supply chain. An important distinction here is the identication (and hence avoidance) of instability in the supply chain.
The VMI scenario is rst described, followed by a description of previous work in
Dynamic stability of a VMI supply chain
181
the eld. A formal description of the VMI system is then presented using causal loop
diagrams, block diagrams and z-transform transfer functions. Important managerial
insights are gained by inspecting the transfer functions. Furthermore, the stability
boundary is established via a novel technique based on the Tustin transformatio n
(Houpis and Lamont 1985). This boundary is determined as a relationship between
the two important system parameters of pipeline gain and inventory gain. The results
are conrmed via the simulation of sample stable; critically stable; and unstable
supply chains. Hence, this paper not only conrms the existence of the instability
problem but also provides guidance on parameter selection to guarantee a stable
response.
3.
The VMI concept

VMI is a unique supply chain control strategy as advocated by Christopher
(1992), Holmstrom, (1998) and Waller et al. (1999) . VMI was however, described
in a presentation of a conceptual design of a production control system as far back as
Magee (1958). Magee also obviously regarded z-transforms as a powerful tool, as he
took responsibility for publishing the rst work (but sadly unnished) on production
and inventory control to exploit them by Vassian (1954). The most signicant fact
about a VMI supply chain is that customers (we term the customer echelon in the
VMI supply chain as the distributor and the supplier echelon in the VMI supply
chain as the manufacturer for clarity) share inventory information and/or point of
sales data rather than orders with their suppliers. Alternatively, end sales data could
be determined from the net change in inventory levels if the distributor does not
disclose this information via EPOS. In addition, the manufacturer could net-o the
inventory from deliveries and sales if the distributor does not have the ability or
inclination to share inventory information but can share end sales data. This is
usually done electronically. What matters in VMI is the allocation of responsibility
for decision-making and the agreed target setting.
The actual inventory at the distributor is then compared with a re-order point
that has been negotiated between the two parties. This is set to ensure adequate
Customer Service Levels (CSLs), without building up excessive stocks and can be
done via the standard re-order point model, for example see Wilkinson (1996). It
triggers a replenishment order that is delivered to the distributor based on the actual
end consumer sales. The replenishment order is calculated by subtracting the reorder point from an order-up-to-point . Each party also agrees the order-up-topoint. Payment is often triggered at this point and funds transferred electronically.
Sometimes payment is only triggered when the end consumer actually buys the
product from the shelf. Either party can do the forecasting of future demand. The
distributors stock requirements are updated regularly and based on the forecast to
ensure high CSL and good stock turns. The distributor replenishes this stock.
The manufacturer then has to set the production targets. We have elected to do
this using the APIOBPCS structure as analysed in depth by John et al. (1994). It can
be expressed in words as, `Let the production targets be equal to the sum of an
exponentially smoothed (over Ta time units) representation of his perceived demand
(that is actually a sum of the stock adjustments at the distributor and the actual
sales), plus a fraction (1=Ti) of the inventory error in stock, plus a fraction (1=Tw) of
the WIP error. This is a generalization of the Popplewell and Bonney (1987) algorithm and an extension to Stermans (1989) anchoring and adjustment heuristic as
identied by Naim and Towill (1995) and further exploited by Mason-Jones et al.
182
Figure 1.
Schematic of VMI.
(1997). By suitably adjusting parameters, APIOBPCS can be made to mimic a wide

range of industrial ordering scenarios including make-to-stock and make-to-order.
Summarizing, the manufacture and distributor collaborate to operate a VMI
strategy. The end consumer buys goods from the distributors stock. The manufacturer manages the distributors stock. The distributor collects information on the
sales to the customer and uses it to provide a forecast of the future likely sales over
the delivery lead-time. This is used to set a re-order point, R, which will be used to
provide safety stock to ensure high availability of goods at the distributor. However,
when sales increase, R should increase, assuming that the distribution lead-time is
constant, to ensure high CSL. R could be set by exponentially smoothing the customer sales over Tq time periods. The distributor sales and the re-order point are
then passed to the manufacturer, who can then determine the distributors stock (via
integration, assuming no shrinkage). When the retailers inventory is below R, the
manufacturer ships goods to inate the retailer stock up to an Order-up-to point (O)
as shown in gure 1.
The manufacturer then has to determine how many products to make in order to
balance the Customer Service Level excess stock trade-o . This is done by netting
o the Goods In-Transit (GIT), the retailers inventory and the factories nished
goods inventory, minus the re-order point level (this is termed the system inventory).
See Disney (2001) for a more detailed explanation of why the re-order point level is
treated in this way, but essentially it is due to the need to avoid the situation where
the distributor stock targets `eat into the usable stock levels at the manufacturer.
This is compared with a target system inventory, and a fraction (1=Ti) of the error in
inventory is taken, summed together with a smoothed representation of demand
(exponentially smoothed over Ta time units) and a fraction (1=Tw) of the Work
In Progress (WIP) error to set the production targets.
4.
Reasons for using transform techniques in production and inventory control

Transfer function techniques are particularly powerful methods of systems analysis for a number of reasons including:
. the use of standard forms, which simplies benchmarking and promulgatio n of
models describing best practice (Towill 1970),
183
. the block diagram format helps identify important system structures (Nise
1995),
. standard techniques enables certain important performance metrics such as
settling time, peak overshoots and rise times to be calculated without recourse
to simulation (Nise 1995),
. frequency domain calculations can be made computationall y very simple, an

important attribute when lter properties are required covering a wide spectrum of demands (Bissell 1996),
. reliable replenishment rules can be adopted from hard systems practice (i.e.
automation via three term controllers) (Towill and Yoon 1982),
. there exists a number of techniques for transferring problems from one domain
(Laplace, time, z, !, Fourier, frequency, NPV etc) into another domain in
order to gain insight from situations that have already been met and solved
elsewhere (Towill 1999),
. Franklin et al. (1990) provide an extended guide to designing discrete systems
via analogue concepts, where the tools and techniques are very well established
and `good practice decision rules are available in abundance,
. the ability to handle the complete time-series as a single entity, i.e. we can
model the relationship between any two time series of a system by a single
transfer function (Popplewell and Bonney 1987),
. they can be easily and rapidly applied to identify important aspects of a systems structure (Popplewell and Bonney 1987),
. they allow a deep and detailed analysis to be conducted if appropriate
(Popplewell and Bonney 1987),
. the nancial implications of a dynamic cash ow can be readily obtained from
the cash ows transfer function via the Net Present Value (NPV) transform
(Grubbstro m 1967). The cash ow transfer function can be obtained by summing weighted signals of a production control system,
. transforms can be used as moment generating functions to study stochastic
systems (Aseltine 1958, Grubbstro m 1996 and Tang 2000a),
. the judicious integration of transfer function techniques with simulation
enables added insight into system design.
Simon (1952) outlined one of the rst uses of transform techniques for the analysis of
an inventory- and order-based production scheduling algorithm using the Laplace
transform . Tustin (1953) applied transform techniques to economic systems. Vassian
(1954) studied an order- and inventory-base d production-scheduling algorithm using
the z-transform. Adelson (1966) used z-transforms of second-order exponential
smoothing forecasting algorithms within an inventory- and order-based production
control system. In passing, Adelson developed the rst known analytic expression
for the phenomenon presently known as `Bullwhip (McCullen and Towill 2000).
Deziel and Eilon (1967) considered a special conservative case of the APIOBPCS
structure where Ti and Tw always assume equal values. They used z-transforms and
quadratic cost functions to study the system. However, inspection of their inventory
response graphs to a step input suggest they use a di erent order of events as there is
an o set in the nal value of inventory, which, as demonstrated by John et al. (1994),
Simon (1952)
Tustin (1953)
Vassian (1954)
Adelson (1966)
Deziel and Eilon (1967)
Bessier and Zehna (1968)
Burns and Sivazlian (1978)
Towill (1982)
Popplewell and Bonney
(1987)
John et al. (1994)
Grubstrom (1998)
Dejonckheere et al. (2001)
Disney (2001)
Yes
Yes
Yes
Visibility of supply chain state
Use average demand to target stock levels
Schedule average demand
Tracking current stock levels
Reference
Measuring accumulated orders in progress
184
Yes
Yes
Di erential equations and Laplace transforms

Flow diagrams, Laplace and z-transforms
Di erence equations and z-transforms
z-Transforms
z-Transforms
z-Transforms
z-Transforms
Block diagram and Laplace transforms
Di erence equations and z-transforms
Yes
#
Yes
Block diagram and Laplace transforms

NPV, Laplace transform and z-transform
Block diagram and z-transforms
Block diagram and z-transforms
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes Yes
Yes
Yes Yes
Yes Yes
Analysis techniques
Yes
Yes
# only at the rst echelon.
Table 1.
Previous work applying transfer function techniques in the eld of production and
inventory control (updated from Edghill and Towill 1989).
is readily avoided. Bessler and Zehna (1968) then extended Vassians model by using
exponential smoothing as a specic forecasting technique. Burns and Sivazlian
(1978) established a four-echelon supply chain ow diagram and z-transform
model based on the Forrester (1961) model. Towill (1982) used block diagrams,
Laplace transforms and coe cient plane models to study an inventory- and orderbased production control system and thereby access hardware system analogues.
Popplewell and Bonney (1987) studied an MRP system using z-transforms.
Bonney et al. (1994) used z-transfor m models of an ROC system and an MRP
system to investigate the e ect of errors and delays in stock recording procedures
on the dynamic system performance.
John et al. (1994) incorporated a pipeline (WIP) controller into an inventory- and
order-based production control system (to create the APIOBPCS model) that was
studied using Laplace transform s and block diagrams. Much research has emanated
from the department of Production Economics in Linkoping. Grubbstrom (1998)
uses Laplace transforms, z-transforms and Net Present Value (NPV) techniques on
MRP systems. He also provides a comparison of the continuous domain and discrete
domain fundamental equations of MRP. Grubbstrom (1967) introduced Laplace
transforms of NPV. The NPV can be directly computed via the transfer function
185
of a cash ow, via a shortcut identied in the Laplace domain, and was extended to
the discrete domain by Grubbstrom (1991). The shortcut relies on the fact that the
NPV represented in exponential form has exactly the same structure as the Laplace
transform . Amazingly, the NPV of a cash ow is calculated from the cash ows
transfer function by simply replacing the complex Laplace variable s with the continuous interest rate r or, in discrete time, replacing z with 1+the discrete interest
rate, r. In work of direct relevance to this paper Wikner (1994a) has exploited the
NPV transform on an IOBPCS (Towill 1982) model in continuous time. Yinzhong
and Grubbstrom (1994) consider the application of the z-transform to net present
value problems. In later research at Linkoping, Grubbstrom and Wang (2000) have
investigated di erent types of capacity constraints using InputOutput Analysis and
the Laplace transform and Tang (2000) has been investigating the use of Laplace and
z-transforms in production and inventory control and using z-transforms of stochastic demands and lead-times within MRP systems. Grubbstrom and Tang (2000)
highlight how the NPV transform can be used as an evaluation function for the
nancial implementations of rescheduling.
Finally, Dejonckheere et al. (2001) have been using z-transforms to investigate
the Bullwhip performance of common forecasting mechanisms such as moving
averages, exponential smoothing and demand signalling within Order-Up-To
models. Dejonckheere et al. (2000) used z-transform s and Fourier transforms to
design particular ordering decisions to suit particular demand patterns via the
Fourier plot and an optimization procedure to `match the frequency response to
the Fourier plot. This may be regarded as supply chain design via the `explicit lter
approach following the analytical results by Towill and del Vecchio (1994) and the
conceptual discussion by Towill et al. (2001). Table 1 briey summarizes the historical development.
5.
Formal description of VMI as an integrated system

Recall that the APIOBPCS structure can be expressed in words as, `Let the
production targets be equal to the sum of an exponentially smoothed representation
of demand (exponentially smoothed over Ta time units), plus a fraction (1=Ti) of the
inventory error in stock, plus a fraction (1=Tw) of the WIP error. In a multi-echelon
inventory decision-making environment, the inventory error corresponds to the
desired inventory in the factory minus the actual inventory in the factory.
However, to extend the APIOBPCS model into VMI-APIOBPCS, the manufacturers nished goods now encapsulate the distributors inventory, the manufacturers nished goods as well as the stock in transport minus the re-order point.
Dening the net sum of these three stocks as the system stock, the VMI-APIOBPCS
can be expressed in words as, `Let the production targets be equal to the sum of an
exponentially smoothed representation of demand (exponentiall y smoothed over Ta
time units), plus a fraction (1=Ti) of the inventory error in system stock, plus a
fraction (1=Tw) of the WIP error. Figure 2 illustrates the ow of information in
this scenario.
The previous verbal description can now be turned into a causal loop diagram as
shown in gure 3. This is particularly useful as a block diagram can be developed, as
shown later in gure 4. It should be noted that, as stated above, the average
consumer demand (CONS) is estimated via a rst-order exponential smoothing
function. The net change in this estimate, from one time period to the next, is
186
Figure 2.
Figure 3.
Overview of the VMI scenario.
Causal loop diagram of VMI-APIOBPCS.
187
then added to the consumer demand. This reects the distributors e ect on the
demand signal in the VMI scenario.
Block diagram and z-transform description of VMI-APIOBPCS
It is useful at this stage to describe the individual building blocks of the VMIAPIOBPCS model. Later, we will describe how these blocks are assembled
together.
A full description of the di erence equations required is described in Appendix
A. Here, in order to facilitate understanding we will only present the highlights.
6.
6.1. The production delay

A pure time delay for production delay is easily described in the z domain by the
delay operator, zTp . Here, Tp represents the production delay expressed as a multiple of the sampling interval. The extra unit of time delay in the exponent of the
production delay in gure 4 is used to ensure the proper order of events is obeyed by
the production control system as rst outlined by Vassian (1954). It should be noted
that the units of Tp are the same as the sampling interval. For example, if we are
sampling our data system daily, then the production delay should be expressed in
days.
6.2. The demand policy
The demand policy operates at the manufacturers echelon. It provides an estimate (AVCON) of sales (and stock adjustments to be introduced later) to be used
Figure 4.
Block diagram representation of VMI-APIOBPCS.
188
as a forecast. A demand policy is needed to ensure the production control algorithm

can recover inventory levels following changes in demand (Disney et al. 1997). It
does this by exponentially smoothing the demand signal (VCON) with a smoothing
constant, Ta. The di erence equation needed to realize the demand policy (for
example in a spreadsheet or computer program) is shown in equation (1).
AVCONt AVCONt1
1
VCONt AVCONt1 :
1 Ta
The z-transform of the exponential smoothing forecaster is given by equation (2). We

can link the smoothing constant in the z-transform to Ta in the di erence equation
using the EXSMO relationship established by Towill (1977). The EXSMO relationship is based on the Matsuburu (1965) Time Delay Theorem that matches the area
under the step response error curve. Specically, 1=1 Ta=t)), where t is
the sampling interval. The sampling interval is assumed to be 1 in this presentation,
but this is not always the case, especially when the problem is transferred into the sdomain in order to exploit previous best practice and standard forms. In such cases,
it is important to ensure that the t is no more than 50% of the value of Ta to ensure
accuracy. However, in most practical cases, experience shows it is surprisingly accurate (Towill 1999) and does not concern us here, as the s-domain is not used in this
presentation.
Az
a
:
1 z1 1
The use of exponential smoothing as a forecasting mechanism has a number of

useful advantages over other mechanisms. Namely, it only requires data to be preserved on the previous forecast and current consumption and it reects more accurately recent changes in consumption, providing more accurate forecasts.
6.3. The distributor s policy

As described earlier, the distributor tracks sales and maintains a re-order point as
a multiple (G) of average (exponentiall y smoothed with the smoothing constant, Tq)
demand. The distributor then takes the di erence in one time periods re-order point
to the previous re-order point and adds this to the demand signal (CONS) to create a
`virtual consumption (VCON). Essentially, the distributors policy acts as a di erence estimator with ltering capabilities and is an e ective bullwhip reduction
mechanism as there are no inventory feedback loops. The di erence equation
describing the distributors policy is shown in equation (3).
1
VCONt CONSt VCONt1
G CONSt VCONt1
1 Tq
1
VCONt2
G CONSt1 VCONt2
3
1 Tq
The z-transfor m of the distributors policy is shown in equation (4), where
1=1 Tq completes the relationship.
Qz 1
G
G
:
1 z1 1 1 z2 1
189
6.4. The inventory policy

System inventory levels are the accumulated sum of the di erence between the
production completion rate and the virtual consumption rate. The di erence equation required to capture inventory levels is shown in equation (5). The two rates are
converted into the inventory levels in the z domain by the Heaviside Step Function
or the integration term, 1=1 z1 ).
AINV t AINVt1 COMRATEt VCONt :
Information on inventory levels is incorporated into the production order rate

(ORATE). This is achieved by adding a fraction (1=Ti) of the di erence between
the target inventory level (TINV) and actual inventory level (AINV).
6.5. The pipeline policy
There are signicant advantages of incorporating WIP information into the
production control system as outlined by John et al. (1994), since a stable and
faster response is thereby enabled. Desired work-in-progress (DWIP) levels are set
as a multiple (T p) of average virtual consumption (AVCON). T p should be set equal
to the production delay, Tp, to ensure inventory levels recover appropriately to
changes in demand, as will be demonstrated later by the Final Value Theorem.
The actual work-in-progress levels (WIP) are calculated as the accumulated sum
of the di erence between production order rate (ORATE) and production completion rate (COMRATE). The di erence equation required to monitor WIP is shown
in equation (6).
WIPt WIP t1 ORATE t COMRATEt :
Again, the two rates (ORATE and COMRATE) are translated into the level WIP by
the Heaviside Step Function or the integration term, 1=1 z1 ). The pipeline information is incorporated into the production order rate by adding a fraction (1=Tw) of
the di erence between desired WIP (DWIP) and actual WIP.
6.6. The block diagram of VMI-APIOBPCS
The block diagram of the VMI-APIOBPCS is shown in gure 4. It describes, in a
structured pictorial form, how the individual policies described earlier t together to
form the production control system. Manipulating the block diagram, yields `transfer functions that describe the relationship between the input (i.e. consumption
(CONS)), and output (i.e. ORATE, COMRATE or AINV) of a system. These zdomain transfer functions describe completely how the sampled data system behaves
in the time domain.
Of particular interest in the block diagram is the Target systems INVentory
(TINV) and VCON signals. The TINV is a constant that species the desired
supply chain stock position (i.e. the sum of the Distributors stock, the Factorys
stock and the goods in transit). It should be set by the manufacturer and is a function
of the demand pattern, the distribution lead-time between the two supply chain
echelons (via G), the production and transportation delay, and the desired availability at the manufacturer and the distributor. The Virtual CONsumption (VCON)
signal is equal to the actual sales plus net changes in stock at the distributor. If
deliveries were made to the distributor every time period then the VCON would also
be equal to the dispatches between the two echelons. However, the factory does not
have to dispatch goods every time period as the option exists to use less frequent
190
deliveries to the distributor so as to exploit the transport cost structure by using

various values of G, as described earlier. In this case, dispatches can be modelled
using the di erence equations shown in Appendix B. See Disney (2001) for more
details on this commercially important issue.
7.
Vendor Managed Inventory system transfer functions

A transfer function describes how the system reacts to a unit impulse at time=0.
The transfer functions for ORATE/CONS, COMRATE/CONS and AINV/CONS
are shown in equations (7) to (9). They have been presented in simplied form to
reduce clutter. However, the transfer functions in standard form can be seen in
Appendix C.
z1Tp G1 z Tq1 z zTa TiTw
ORATE
T pTi1 z 1 Ta TiTwz
;
Ta1 z zTq1 z zTw Ti1
CONS
1 Tw1 zzTp
COMRATE
CONS
ANV
CONS
G1 z Tq1 z zTa TiTw

T pTi1 z 1 Ta TiTwz
:
Ta1 z zTq 1 z zTw
Ti1 zTp Tw1 z z
TizG1 z Tq1 z zTa T p Tw z Taz

T pz Twz 1 Tw1 zzTpTa1 z z
:
1 zTa1 z zTq1 z zTw Ti1
1 Tw1 zzTp
In order to determine the time domain response of the system to a unit impulse the
inverse z-transform of the transfer function is taken. This can be achieved by four
main methods:
. taking partial fractions and looking up in z-transform tables to nd a match,
. long division,
. the Cauchy Product,
. taking the following integral counter-clockwise, where Xz is the system transfer function multiplied by the z-transform of the desired input leading to the
expression;
xr
1
2j
Xzzt1 dz:
c
10
Specic inverse z-transform were found by the authors by using the computer program Mathematica 1 (Wolfram Research, Champaign, IL) to avoid errors and
lengthy, tedious algebraic manipulation. There also exists a number of other computer based inverse z-transform procedures, for example see Popplewell and Bonney
(1987).
8.
The initial and nal value theorem

The initial value theorem is a useful mathematical crosscheck and guide to the
suitable initial conditions required for simulation. Applying the initial value theorem
191
and exploiting LHopitalss Rule to nd indeterminate solutions where required

shows that ORATE, COMRATE and AINV have an initial value of zero for
VMI-APIOBPCS. This was found also to be the case for APIOPBCS by John et
al. (1994). The nal value theorem is a useful tool to determine the long-term transient behaviour of a transfer function and for the verication of simulations. The
nal value for ORATE and COMRATE for a stable system is unity, but it can be
very importantly shown that, if the estimate of the production lead-time (T p) is not
equal to the actual production lead-time, then there is an o set in nal value of the
AINV. Thus, it is important to obtain accurate estimates of Tp. This was also
identied by John et al. (1994) for APIOBPCS. It is for this reason that we suspect
that the Deziel and Eilon (1967) system considers a di erent sequence of events than
the one our model follows. Here, we strictly follow the same order of events as the
popular MIT management game, known as the Beer Game (Sterman 1989), and by
Vassian (1954).
9.
Dynamic response of the VMI system

It is useful at this stage to illustrate the dynamic response of the system. A typical
time series of the production order rate response of the VMI-APIOBPCS system to a
step input is shown in gure 5. A more detailed description of the individual controller contributions (such as the inventory policy, WIP policy and demand policy)
to ORATE within the APIOBPCS structure can be seen in Disney et al. (1997). Here,
we need only to illustrate the impact of G and Tq on the system. Being outside the
feedback loop they do not a ect stability, but clearly a ect the supply chain
response. In this example, the system parameters were G 2, Ta 8,
Tq Ti Tw Tp T p 4. The plot clearly shows how the re-order plot changes
from 0 to 2 ltered by the exponential smoothing parameter Tq. The nal value of
the re-order point will always be equal to G. Smaller values of Tq will reduce the time
needed to `lock-on to the nal value of R and vice versa. The dSS signal shows the
net change of the re-order point from one time period to another. When dSS is added
to the Sales signal we can see the e ect the re-order point updating has on the virtual
consumption (VCON) the manufacturer has to produce. The manufacturer ORATE
to the VCON signal is also plotted and shows that we must over-produce to demand
Figure 5.
A typical ORATE response to a step input.
192
in order to account for inventory errors that result from a nite production leadtime.
Investigation of the system zero and poles: special case when Ti Tw
A useful property of the z-transform is the stability test. It is well known that a
system is stable if all the roots of its characteristic equation lie within the unit circle
in the z-plane (Jury 1958). Figure 6 shows the poles (roots of the denominator of the
ORATE transfer function) and the zeros (roots of the numerator of the ORATE
transfer function) for the VMI system when Ta 8, Ti Tp T p Tq 4,
Tw 12, G 1. Notice that we have complex roots, which, in this particular case,
belong to a stable system, as they are all inside the unit circle. This need not be the
case however, as particular combinations of system parameters can produce unstable
systems. Thus, it is useful to check the stability of system designs via the zero-pole
plot.
Interestingly, if Tw is constrained always to equal Ti, (i.e. the DezielEilon
arbitrary setting) the ORATE transfer function reduces in complexity to that
shown in equation (11).
10.
ORATE zTa T p Ti z Taz T pz TizG Tq z Gz Tqz
:
CONS
Ta z Taz1 Ti TizTq z Tqz
11
Solving equation (11) for its poles and zeros yields table 2. Inspection of table 2
shows that the roots always lie on the real axis on the z-plane, as there are no
imaginary parts to the roots. Further inspection also shows that the real roots are
always positive and less than unity. Thus, we can be permitted to declare that if
Tw Ti then we will always have a stable system no matter what values of Ta, Tq,
G, T p we choose. This is an important result because it means that, under the con-
Figure 6.
Poles and zeros of VMI-APIOBPCS.

Poles
Zeros
Ta
1 Ta
1 Ti
Ti
Tq
1 Tq
193
Ta T p Ti
1 Ta Tp Ti
G Tq
1 G Tq
Table 2. Roots of the ORATE

transfer function when Tw Ti
for VMI-APIOBPCS.
Figure 7.
Step response of VMI-APIOBPCS WHEN Tw Ti
dition Ti Tw, the VMI system will always be robust to end-user intervention. A
similar result can also be found for APIOBPCS. Sample time domain responses
when Ti Tw to a step input are shown in gure 7.
11. E ect of the distribution pattern of the production delay
The general form of a production lag (as opposed to a pure time delay) is shown
in equation (12), (Wikner 1994b). Here, n refers to the order of the production lag
and Tp refers to the length of the delay, that is, its pure time delay equivalent
Pz
nz
Tp1 z nz
12
Equation (13) shows the ORATE transfer function derived from the block diagram
if the production delay operator, zTp in gure 4 is replaced with the Pz dened by
equation (12) for the case when Tw equals Ti. (Note that the unit delay, z1 , is still
required to ensure the correct order of events.)
194
0
Pure time delay
First order delay
Third order delay
Table 3.
0 0.47333 0.89614 1.16831 1.33441 1.42732 1.47056

0 0.47222 0.89614 1.16831 1.33441 1.42732 1.47056
0 0.47222 0.89614 1.16831 1.33441 1.42732 1.47056
1.48086 1.47000 1.44621

1.48086 1.47000 1.44621
1.48086 1.47000 1.44621
Time domain ORATE responses of VMI-APIOBPCS illustrating the robustness of

the design case when Ti Tw.
ORATE zTa T p Ti z Taz T pz TizG Tq z Gz Tqz
:
CONS
Ta z Taz1 Ti TizTq z Tqz
13
Comparison of equations (11) and (13) shows that, in the case when Tw Ti, the
VMI-APIOBPCS model is robust to changes in the distribution of the production
lead-time as the dynamic response is independent of the structure of the production
lead-time because the two equations are identical. This is an important insight,
because it means that if the actual distribution of the production lead-time is not
known, then setting Tw Ti will make the scheduling procedure robust to discrepancies between the actual distribution of lead-time and that used in the scheduling
system. Obviously, it is also robust to the production lead-time distribution changing
over time. Again, it can be shown that this insight also applies to the basic
APIOBPCS model. Table 3 veries this result as inspection shows that the ordinates
are identical over time for the case Ti Tw 4 for a sample unit step response.
Wikner (1994b) discusses how lags of di erent orders may be interpreted as stochastic delays with various distributions when modelling the expected dynamic behaviour of a system. He argues that a rst-order lag may be considered as modelling an
exponential distribution, and higher orders representing the Erlangk distribution,
where the order of the lag, n, corresponds to the order, k, of the general Erlang
distribution. A lag of order 30 approximates a normal distribution. A lag of innite
order refers to a pure time delay from the denition of the exponential. The logical
extension of this discussion is that setting Ti Tw will produce a system that is
robust to stochastic delays and the distribution of those delays.
12.
General stability criteria for VMI-APIOBPCS

It is essential to know when the VMI is stable and when the system is unstable. It
is particularly important to understand system instability, as in such cases the system
response to any change in input will result in uncontrollabl e oscillations of increasing
amplitude and apparent chaos ensuing in the supply chain. The previous section
showed that the special case of Tw Ti guarantee s a stable and robust system. This
section will present a method to determine the limiting condition for stability in
terms of the variable design parameters. The procedure was rst described by Jury
(1964), as a general method for investigating stability issues, although he argued that
the algebraic manipulation required is unmanageabl e for high order systems and
responded by presenting other, more direct, methods. However, now that computer
assistance is available for manipulating algebra the authors used Mathematica 1
(Wolfram Research, Champaign, IL) the method will be revisited. This is justied
as it was found that algebraic stability conditions are more easily derived in the last
stage of the methodology presented here.
195
First, we eliminate all design parameters that do not a ect stability. It can be
easily shown that the stability of VMI-APIOBPCS does not depend on Ta, Tq or G
since they appear outside the feedback loops. This result is readily established via
conventional block diagram manipulation (Towill 1970). Note that having selected
stable design parameters, Ta, Tq and G signicantly a ect the VMI supply chain
response to any particular demand pattern. For subsequent optimization of performance a procedure based on production adaptation and inventory costs is available
(Disney 2001). Now given that these parameters (Ta, Tq and G) can be set arbitrarily
to inspect stability further, we can choose values that reduce the complexity of the
characteristic equation (G 0 and Ta 0 are suitable). In order to avoid solving a
transcendental function it is also necessary to specify a value for Tp, therefore Tp
was set to equal three. T p was also set to Tp in order to eliminate inventory o sets
over time as proven by John et al. (1994). The ORATE transfer function then
becomes that shown in equation (14),
ORATE
z3 Ti3 Tw1 z Twz
:
CONS
Tw Ti1 z1 z z2 Twz3
14
In order to determine the stability in the z domain it is necessary to inspect each root
to determine if it is outside the unit circle. The problem is that the algebraic solutions
of these high order polynomials involve a very complex mathematical expression
that typically contains lots of trigonometric functions that need inspection. In such
cases, the necessary and su cient conditions to show if the roots lie outside the unit
circle are not easy to determine. Therefore, the Tustin Transformation is taken to
map the z-plane problem into the !-plane. The Tustin transform is shown in equation (15),
z
!1
:
! 1
15
This changes the problem from determining when the roots lie inside the unit circle
to whether they lie on the left-hand side of the !-plane (Houpis and Lamont 1985).
The !-plane transfer function now becomes equation (16) and the resultant characteristic equation (the denominator of the transfer function) is shown in equation
(17).
ORATE
1 !3 Tw Tw 2Ti3 Tw!
;
CONS
2Ti1 !3 !2
Tw1 !2Ti1 !3 2 !2 2 !!
16
C! Tw 6Ti 4Tw 2TiTw! 6Ti 6Tw 6TiTw!2

2Ti 4Tw 6TiTw!3 2Ti Tw 2TiTw!4 :
17
This equation is still not easy to investigate algebraically, but the Routh-Hurwitz
stability criterion can now be utilized which does enable a solution.
13. Matching Tw to Ti to guarantee system stability

The RouthHurwitz array is shown in table 4 (Towill 1970). The coe cients a0 to
a4 refer to the coe cients of equation (19) and when substituted into the array yield
196
table 5. This is the !-transformed VMI characteristic equation written into the
RouthHurwitz Array.
For stability, it is known that a4 , a3 , 1 , 1 and 1 must all be positive. Inspection
of a4 shows that it is always positive, as it is for a3 , 1 and 1 . The case of 1 is more
interesting, as this is the component of the array that can, under certain circumstances, become negative. Therefore, in order to determine stability, the relevant
roots of 1 are found for Tw. Plotting this function on the parameter plane yields
gure 8, which shows the boundary of stability for di erent Tw and Ti for VMIAPIOBPCS when Tp T p 3. Figure 8 also highlights six possible designs that are
to be used as test cases of the stability criteria via sample time domain responses to a
unit step input. This result is also true for APIOBPCS. Solving 1 for Ti yields a very
lengthy function but the limiting case of Tw ! 1 (i.e. the stability of IOBPCS)
shows that Ti > 2:24698 also always produces a stable system.
Figure 8 shows the Ti Tw parameter plane with equation (20) superimposed.
Also shown for reference is the Tw Ti line (the DezielEilon line), which obviously
guarantees a stable APIOBPCS design. The extension to VMI-APIOBPCS is, however, unique to this paper. We now need to test that our approach utilizing the
Tustin transformatio n is a good predictor. Hence, for sample values of Tw the
exact step responses of the VMI-APIOBPCS supply chain have been simulated
(see gure 9) for stable; critically stable; and unstable designs. These plots conrm
the theory by clearly identifying the stable region for VMI-APIOBPCS operation. A
s4
s3
a4
a3
s2
a3 a2 a4 a1
a3
s1
1 a1 a3 2
1
s0
1 2 1 0
1
Table 4.
a2
a1
2
a0
0
a3 a0 a4 0
a3
20
The general RouthHurwitz array for a

fourth-order system.
s4
2Ti Tw 2TiTw
6Ti 6Tw 6TiTw
Tw
s3
2Ti 4Tw 6TiTw
6Ti 4Tw 2TiTw
s2
Tw10Tw Ti11 16Ti1 Tw 9Tw

Ti 2Tw 3TiTw
s1
32Tw2 Ti 3 1 Tw3 Tw TiTw3 Tw

Ti 2 2 22 TwTw
10Tw Ti11 16Ti1 Tw 9Tw
s0
Tw
Table 5.
Tw
The RouthHurwitz array established for VMI-APIOBPCS.
Figure 8.
Parameter plane demonstration of stable and unstable regions of VMIAPIOBPCS.
Figure 9.
Sample dynamic responses of VMI-APIOBPCS supply chains.
197
198
full-scale optimization methodology for VMI-APIOBPCS is well beyond the scope

of this paper, but is available in Disney (2001). Here, we are concerned with establishing the stability in the Tw Ti plane and demonstrating the correctness via
simulation. This has been achieved. In passing, we also note the conservative
nature of the DezielEilon setting of Tw Ti. Furthermore, we have shown an
unexpected bonus to this choice of parameters, namely that the response is then
completely robust to changes in the lead-time distribution.
Therefore the stability conditions for VMI-APIOBPCS and APIOBPCS when
T p Tp a pure time delay of 3 time units are:
Ti > 2:24698 for Tw 1 i:e: no WIP feedback
20
Ti3 4Ti 2Ti2 Ti1 2Ti 1 4Ti2

Tw <
:
21 Ti 2Ti2 Ti3
21
or
14.
Conclusions
A VMI-APIOBPCS supply chain has been described using causal loop diagrams,
block diagrams, di erence equations and z-transforms. These have proved to be very
powerful methods for investigating a Vendor Managed Inventory system. The Final
Value Theorem has demonstrated the importance of obtaining accurate estimates of
the production lead-time, Tp. The time domain behaviour of the system has been
illustrated. It has been shown that if Ti Tw a stable system that is robust to
changes in the distribution of the production delay is always produced. A procedure
for determining the general stability conditions for VMI-APIOBPCS and
APIOBPCS has also been evaluated by example for the case when T p Tp 3.
The stability conditions have been presented. The adequacy of the method has been
demonstrated by simulating predicted stable; critically stable and unstable VMIAPIOBPCS designs. Our results conrm that the predicted instability boundary is
indeed correct. Consequently, the method may be used with condence in dening
the region in the Tw Ti parameter plane corresponding to a reasonable stability
margin. Finally, we emphasise the importance of proper timing and matching of the
two feedback loops so as to ensure stable operations. It is thereby shown that the
DezielEilon APIOBPCS setting of Ti Tw always leads to a conservative design.

Appendix A:
The di erence equations required for virtual consumption based VMIAPIOBPCS
Description
199
Di erence equations
1
VCONt AVCONt1 ;
1 Ta
Eqn
no.
Consumption forecast
AVCONt AVCONt1
Target (desired) WIP
DWIPt AVCONt
Actual WIP
WIPt WIPt1 ORATEt COMRATEt ;
(A3)
Inventory error
EINVt DINVt AINVt ,
(A4)
Order rate
ORATEt AVCONt1
(A5)
Completion rate
COMRATEt ORATEtTp ,
(A6)
Actual inventory level
AINVt AINVt1 COMRATEt CONSt ;
1
VCONt CONSt VCONt1
G CONSt
1 Tq

1
VCONt1 VCONt2
G CONSt1
1 Tq
VCONt2
(A7)
Virtual consumption
Typical test input
CONSt
Typical target inventory DINVt 0:
0 if t 0
1 if t > 0
T p;
EINVt1 DWIPt1 WIPt1
,
Ti
Tw
for a step input.
(A1)
(A2)
(A8)
(A9)
(A10)
200
Appendix B:
The di erence equations required for the proposed integrated VMI

system (for modelling disaggregate inventory levels and transportatio n
dispatches in the VMI-APIOBPCS model)
Description
Di erence equations
Forecasted re-order point

at the distributor
Rt Rt1
Order-up-to point at the
distributor
Distributors inventory
level
Goods In Transit
between factory and
distributor
1
G
1 Tq
CONSt Rt1
Eqn
no.
(B1)
Ot Rt ETQt ,
(B2)
DINVt DINVt1 CONSt DEStT ,
(B3)
PitT 1
DESt , where T is the transportation

lead-time,
TQt1 if DINVt1 GITt1 < Rt1

DESt
;
0 if DINVt1 GITt1 Rt1
(B4)
Transport quantity
TQ t CONSt or ETQ t ;
(B6)
System inventory levels
SINVt FINVt GITt DINVt Rt ;
(B7)
Factory inventory levels
FINVt FINVt1 COMRATEt DESt ,
(B8)
Virtual consumption
VCONt CONSt dSSt ,
(B9)
Net changes in the

distributors re-order
point level
dSSt Rt Rt1 ;
(B10)
Dispatches
GITt
i1
(B5)
Forecasted
consumption for the
factory
AVCONt AVCONt1
1
VCONt AVCONt1 ; (B11)
1 Ta
Desired WIP
DWIPt AVCONt
T p,
(B12)
Actual WIP
WIPt WIPt1 ORATEt COMRATEt ,
(B13)
Error in WIP
EWIPt DWIPt WIPt ;
(B14)
Order rate
ORATEt AVCONt1
Completion rate
COMRATEt ORATEtTp ,
(B16)
Error in system
inventory levels
EINVt TINVt SINVt ,
(B.17)
Typical test input
CONSt
Typical target inventory
TINVt 0:
0
1
if t 0
if t
EINVt1 EWIP t1
;
Ti
Tw
, for a step input
(B15)
(B18)
(B19)
201
Appendix C: System transfer functions in standard form

The general form of the discrete transfer function is a ratio of two polynomials in
z, see equation (C1). Throughout this contribution, the gain K is 1. The other
coe cients are given in the following tables.
!
b 0 b 1 z b 2 z2
b q zq
F z K
C1
a0 a1 z a2 z2
a m zm
Coe cient
b0
b1
b2
b3
b4
b5
b6
b7
a0
a1
a2
a3
a4
a5
a6
a7
ORATE value
0
0
0
0
0
G T p Ti T pTiTq GTa TiTw Ta TiTqTw
T pTi 2GT p Ti 2T pTiTq Ta TiTw GTa TiTw
G1 Ta TiTw 1 Ta TiTqTw Ta TiTqTw
T pTi GT pTi T pTiTq 1 Ta TiTw G1 Ta TiTw
1 Ta TiTqTw
TaTiTq TaTqTw
TaTi TiTq 2TaTiTq TaTw TqTw 2TaTqTw
Ti TaTi TiTq TaTiTq Tw TaTw TqTw TaTqTw
0
TaTiTq TaTiTqTw
TaTi TiTq 2TaTiTq TaTiTw TiTqTw 3TaTiTqTw
Ti TaTi TiTq TaTiTq TiTw 2TaTiTw 2TiTqTw 3TaTiTqTw
TiTw TaTiTw TiTqTw TaTiTqTw
Coe cient list for the ORATE transfer function.
Coe cient
b0
b1
b2
b3
b4
b5
b6
b7
a0
a1
a2
a3
a4
a5
a6
a7
AINV value
0
GTaTi GT pTi TaTiTq T pTiTq GTiTw TiTqTw
GTi TaTi GTaTi T pTi GT pTi TiTq+ TaTiTq T pTiTq
TiTw GTiTw TiTqTw
Ti
Ti
Ti GTaTi TaTiTq GTaTiTw TaTiTqTw
Ti GTi TaTi GTaTi TiTq TaTiTq GTiTw+TaTiTw
2GTaTiTw TiTqTw 2TaTiTqTw
TiTw GTiTw TaTiTw GTaTiTw TiTqTw TaTiTqTw
TaTiTq TaTqTw
0
TaTiTq TaTiTqTw
Coe cient list for the AINV transfer function.
202
Coe cient
b0
b1
b2
b3
b4
b5
b6
b7
a0
a1
a2
a3
a4
a5
a6
a7
COMRATE value
GT pTi T pTiTq GTa TiTw Ta TiTqTw
T pTi 2GT pTi 2T pTiTq Ta TiTw GTa+TiTw
G1 Ta TiTw 1 Ta TiTqTw Ta TiTqTw
T pTi GT pTi T pTiTq 1 Ta TiTw+ G1 Ta TiTw
1 Ta TiTqTw
0
0
0
0
0
TaTiTq TaTqTw
0
TaTiTq TaTiTqTw
Coe cient list for the COMRATE transfer function.
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A Discrete Transfer Function Model

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International Journal of Production Research

ISSN: 0020-7543 (Print) 1366-588X (Online) Journal homepage: http://www.tandfonline.com/loi/tprs20

A discrete transfer function model to determine

Published online: 14 Nov 2010.

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Date: 29 September 2015, At: 22:22

int. j. prod. res., 2002, vol. 40, no. 1, 179 204

A discrete transfer function model to determine the dynamic stability of a

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S. M. DISNEYy* and D. R. TOWILLy

average consumption z-transfor m transfer function,

Revision received May 2001.

S. M. Disney and D. R. Towill

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system z-transform transfer function multiplied by the

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Dynamic stability of a VMI supply chain

The VMI concept

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S. M. Disney and D. R. Towill

(1997). By suitably adjusting parameters, APIOBPCS can be made to mimic a wide

Reasons for using transform techniques in production and inventory control

Dynamic stability of a VMI supply chain

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. frequency domain calculations can be made computationall y very simple, an

Visibility of supply chain state

Use average demand to target stock levels

Schedule average demand

Tracking current stock levels

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Measuring accumulated orders in progress

S. M. Disney and D. R. Towill

Di erential equations and Laplace transforms

Block diagram and Laplace transforms

# only at the rst echelon.

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Dynamic stability of a VMI supply chain

Formal description of VMI as an integrated system

S. M. Disney and D. R. Towill

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Overview of the VMI scenario.

Causal loop diagram of VMI-APIOBPCS.

Dynamic stability of a VMI supply chain

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6.1. The production delay

Block diagram representation of VMI-APIOBPCS.

S. M. Disney and D. R. Towill

as a forecast. A demand policy is needed to ensure the production control algorithm

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The z-transform of the exponential smoothing forecaster is given by equation (2). We

The use of exponential smoothing as a forecasting mechanism has a number of

6.3. The distributor s policy

Dynamic stability of a VMI supply chain

6.4. The inventory policy

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AINV t AINVt1 COMRATEt VCONt :

Information on inventory levels is incorporated into the production order rate

S. M. Disney and D. R. Towill

deliveries to the distributor so as to exploit the transport cost structure by using

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