Econometrica: Nov, 1985, Volume 53, Issue 6

The Variability of Aggregate Demand with (S, s) Inventory Policies

https://doi.org/0012-9682(198511)53:6<1395:TVOADW>2.0.CO;2-P
p. 1395-1410

Andrew S. Caplin

This paper develops a general theory of the aggregate implications of (S, s) inventory policies. It is shown that (S, s) policies add to the variability of demand, with the variance of orders exceeding the variance of sales. Overall, the (S, s) theory contradicts the widely held notion that retail inventories act as a buffer, protecting manufacturers from fluctuating sales.