The value of coordination in a two-echelon supply chain

Abstract

We study a coordination scheme in a two-echelon supply chain. It involves sharing details of replenishment rules, lead times, demand patterns and tuning the replenishment rules to exploit the supply chain's cost structure. We examine four different coordination strategies: naïve operation; local optimization; global optimization; and altruistic behavior on behalf of the retailer. We assume the retailer and the manufacturer use an order-up-to policy to determine replenishment orders and the consumer's demand is a stationary independent and identically distributed random variable. We derive the variance of the retailer's order rate and inventory levels and the variance of the manufacturer's order rate and inventory levels. We initially assume that costs in the supply chain are directly proportional to these variances (and later the standard deviations) and investigate the options available to the supply chain members for minimizing costs. Our results show that if the retailer takes responsibility for supply chain cost reduction and acts altruistically by dampening his or her order variability, then the performance enhancement is robust to both the actual costs in the supply chain and to a naïve or uncooperative manufacturer. Superior performance is achievable if firms coordinate their actions and if they can find ways to reallocate the supply chain gain.

Behavioral causes of the bullwhip effect: An analysis using linear control theory

“…The first behavior we study, over-reaction to inventory and pipeline mismatches, can be thought of as a bias born out of a panic reaction-a desire to reach the target level as soon as possible. The literature warns about the detrimental effects of such behavior under certain parameter settings; Disney et al (2008) show that in the case of a DE-APVIOBPCS policy, γ I = γ P > 1 always induces a stationary bullwhip. In Section 4.1.1, we show that this holds for general APVIOBPCS systems; the bullwhip measure increases rapidly when γ I > 1 or γ P > 1.…”

Dynamic price quotation in a responsive supply chain for one-of-a-kind production

“…An OKP supply chain is characterized by SMEs, batches of orders that are small or just one item, maketo-order production, downstream firms that cannot guarantee future orders to upstream firms, and detailed requirements that change from order to order. Because of these features, it is difficult for firms within the same OKP supply chain to form a reliable cooperative relationship through contract or integration based on revenue and information sharing (Giannoccaro and Pontrandolfo, 2004;Disney et al, 2008;Kelle et al, 2009). In this work, we examine supply chain coordination without revenue and information sharing.…”

Determination of the optimal degree of information sharing in a two-echelon supply chain

“…The effective communication and integration of information are critical for the success of a supply chain (Sahin and Robinson 2002;Disney et al 2008). In general, the more the information that is shared, the more the business is successful.…”