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Optimal capacity in a coordinated supply chain
Authors
Arrow
Bradley
+22 more
Bradley
Buzacott
Ciarallo
Federgruen
Federgruen
Glasserman
Glasserman
Glasserman
Hanson
Holt
Huggins
Kapuscinski
Kapuscinski
Lee
Lee
Manne
Parker
Puterman
Sennott
Sobel
Tayur
Van Mieghem
Publication date
1 January 2008
Publisher
'Wiley'
Doi
Cite
Abstract
We consider a supply chain in which a retailer faces a stochastic demand, incurs backorder and inventory holding costs and uses a periodic review system to place orders from a manufacturer. The manufacturer must fill the entire order. The manufacturer incurs costs of overtime and undertime if the order deviates from the planned production capacity. We determine the optimal capacity for the manufacturer in case there is no coordination with the retailer as well as in case there is full coordination with the retailer. When there is no coordination the optimal capacity for the manufacturer is found by solving a newsvendor problem. When there is coordination, we present a dynamic programming formulation and establish that the optimal ordering policy for the retailer is characterized by two parameters. The optimal coordinated capacity for the manufacturer can then be obtained by solving a nonlinear programming problem. We present an efficient exact algorithm and a heuristic algorithm for computing the manufacturer's capacity. We discuss the impact of coordination on the supply chain cost as well as on the manufacturer's capacity. We also identify the situations in which coordination is most beneficial. © 2008 Wiley Periodicals, Inc. Naval Research Logistics, 2008Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/58030/1/20271_ftp.pd
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Deep Blue at the University of Michigan
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