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. The focus is to develop insights for inventory management to prevent stock-outs and unfilled orders and to fill customer orders at the lowest possible cost to supply chain partners under different scenarios, in a two-player supplier-retailer supply chain. Moderate levels of inventory, defining appropriate performance functional, appear to be crucial in choosing the right policies for managing retail supply chain systems. The 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 off opportunities. 1. Introduction There 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 predefined performance functional. One significant difference 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 fill 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 significant. The structural model used for retailers does not include the manufacturing delay found in manufacturing models, typically known as cycle time. Further, the goals and objectives of retailers are different from those of manufacturers. Manufacturing supply chains are focused on minimizing a bullwhip effect, while retailers are more interested in minimizing unfilled order costs and inventory-carrying costs. This is the fabric, the substance, this paper will address—the supply-chain needs of retailers accomplished via a control theory optimization process. This study is part of a series of studies
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