• Management Science and Financial Engineering
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• v.10 no.2
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• pp.29-51
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• 2004

In this paper, the cost impact of incorrect assumptions about the demand process in a supply chain in which there are two participants, a retailer and a manufacturer, is considered. When participants in the supply chain do not notice serial correlation in the demand process, they would turn to a simple inventory model based on an i.i.d. demand assumption. A mathematical model that allows us to quantify the cost incurred by each participant in the supply chain, when they implement inventory policies based on correct or incorrect assumptions about the demand process, is developed. This model enables us to identify how much it differs from the optimal costs.