Joint quantity flexibility for multiple products in a decentralized supply chain (original) (raw)
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Flexibility or cost saving? Sourcing decisions with two suppliers
Decision Sciences, 2010
This article studies a decentralized supply chain in which there are two suppliers and a single buyer. One supplier offers the quantity flexibility (QF) contract to the buyer, while the other offers the cheaper price. Under the QF contract, the buyer does not assume full responsibility for the forecast, yet the supplier guarantees the availability of the forecasted quantity with additional buffer inventory. On the other hand, the price-only contract places full inventory burden on the buyer, but with a cheaper price. We study this problem from the buyer's perspective and solve for the buyer's optimal procurement and forecasting decisions. We identify areas where flexibility and cheaper price have an advantage, one over the other. Our results indicate that the buyer significantly benefits from having multiple sources of supply. We also find that, from the system's standpoint, a multisupplier system may outperform a single-supplier supply chain under certain conditions. Interestingly, we observe that providing too much flexibility may benefit the low-price supplier rather than benefiting the QF supplier. We discuss the managerial implications and provide directions for future research opportunities.
Jurnal Ilmiah Teknik Industri
Efficiency in the supply chain can be established by integrating the supplier-retailer inventory policy. This article proposes the integrated inventory model between supplier-retailer under stochastic demand. This model aims to determine the optimal review period and calculate the total inventory cost, including some defective items, backorder price discounts, and losing flexibility costs. We assume that the retailer can order 'n' times for every 'm' shipment from supplier to retailer in each production cycle under a periodic review. Stochastic conditions can cause sudden changes in orders by the retailer in large quantities, eventually forcing the supplier to reduce their setup policies. This condition makes the retailer be charged a losing flexibility cost as compensation for the reduction setup pushed by the supplier in a long-term partnership contract. Based on numerical examples and sensitivity analysis, the percentage of defective items in each shipment from s...
Evaluating supply chain flexibility with order quantity constraints and lost sales
International Journal of Production Economics, 2010
In a flexible supply chain buyers and suppliers are willing to accommodate the uncertainties and variations in each other's businesses. In many instances the buyer may prefer to use supply flexibility, as opposed to an inventory holding strategy, to counter demand uncertainty. We consider the case where the buyer releases a fixed period replenishment order to the supplier under a supply contract defined by three parameters: (i) supply price per unit (ii) minimum order quantity and (iii) order quantity reduction penalty. Following a demand drop the buyer therefore has two flexibility options in the order cycle: (i) to place an order less than the supplier specified minimum order quantity and pay the associated penalty, or (ii) place no order and lose the sales for the current period. There is no penalty for not placing an order. A key buyer decision then is Q lost , the order or replenishment quantity level below which no order is placed and the sales are lost. A model for deriving the expected supply and lost sales cost as a function of Q lost is presented, and it is shown that the optimal value of Q lost is the inflexion point of the lost sales cost and the quantity penalty. The model is then used to select the supplier that minimizes the procurement plus lost sales costs from a given set of supply bids and a known expected customer demand behavior. Finally, the buyer also has the option to make capital investments in the supplier so as to reduce the minimum order quantity and hence reduce the projected supply costs. We evaluate the economics of this tactic.
Analysis of supply contracts with quantity flexibility
European Journal of Operational Research, 2009
This paper explores a class of supply contracts under which a buyer receives discounts for committing to purchases in advance. The further in advance the commitment is made, the larger the discount. As time rolls forward, the buyer can increase the order quantities for future periods of the rolling horizon based on updated demand forecast information and inventory status. However, the buyer pays a higher per-unit cost for the incremental units. Such contracts are used by automobile and contract manufacturers, and are quite common in fuel oil and natural gas delivery markets. We develop a finite-horizon dynamic programming model to characterize the structure of the optimal replenishment strategy for the buyer. We present heuristic approaches to calculate the order volume in each period of the rolling horizon. Finally, we numerically evaluate the heuristic approaches and draw some managerial insights based on the findings.
When, in a supply chain, a supplier and a buyer have the choice of transaction form to do business, the equilibrium transaction form which emerges is much more constrained than previously envisaged in literature. In this paper, two forms of long-term supply contracts and procurement in the spot market are compared. A capacity constrained service provider and a buyer of such service choose among three different transaction forms: spot procurement, minimum purchase commitment and quantity flexibility contracts. The ultimate demand the buyer has to satisfy and the spot market price of the input she has to purchase from the supplier are exogenous stochastic processes. Complete analytical results and a numerical example are presented. This paper builds upon recent supply chain contract literature by trying to join in one setting problems which up till now were considered in isolation.
Improving Supply Chain Performance: Real-Time Demand Information and Flexible Deliveries
Manufacturing & Service Operations Management, 2010
I n some supply chains, materials are ordered periodically according to local information. This paper investigates how to improve the performance of such a supply chain. Specifically, we consider a serial inventory system in which each stage implements a local reorder interval policy; i.e., each stage orders up to a local basestock level according to a fixed-interval schedule. A fixed cost is incurred for placing an order. Two improvement strategies are considered: (1) expanding the information flow by acquiring real-time demand information and (2) accelerating the material flow via flexible deliveries. The first strategy leads to a reorder interval policy with full information; the second strategy leads to a reorder point policy with local information. Both policies have been studied in the literature. Thus, to assess the benefit of these strategies, we analyze the local reorder interval policy. We develop a bottom-up recursion to evaluate the system cost and provide a method to obtain the optimal policy. A numerical study shows the following: Increasing the flexibility of deliveries lowers costs more than does expanding information flow; the fixed order costs and the system lead times are key drivers that determine the effectiveness of these improvement strategies. In addition, we find that using optimal batch sizes in the reorder point policy and demand rate to infer reorder intervals may lead to significant cost inefficiency.
Dynamic procurement in a capacitated supply chain facing uncertain demand
IIE Transactions, 2008
In an environment where a buyer procures capacity from a capacitated supplier through a wholesale price contract, we investigate the impact of timing of decisions and additional demand information on the supplier's pricing and the buyer's procurement decisions. As the selling season approaches, the buyer and the supplier have better information about the demand process. We question to what degree waiting until the demand uncertainty is resolved -given that such an option is feasible -is the best alternative for the supply chain partners. Our main model is a two-period dynamic pricing/procurement game where the supplier sets wholesale prices dynamically; he sets the second period price after seeing the demand state as well as the buyer's first period procurement quantity. We also study two single period models based on the information available to the players prior to their decisions. For each model, we find the subgame perfect Nash equilibrium in a closed form and analyze the players' behaviors to determine the impact of the additional information and trading periods on their welfare. We also consider the supplier's optimal capacity decision. Several additional insights are obtained through numerical experiments.
Inventory Management with Advance Demand Information and Flexible Delivery
Management Science, 2008
This paper considers inventory models with advance demand information and flexible delivery. Customers place their orders in advance, and delivery is flexible in the sense that early shipment is allowed. Specifically, an order placed at time t by a customer with demand leadtime T should be fulfilled by period t + T ; failure to fulfill it within the time window [t, t + T ] is penalized. We consider two situations: (1) customer demand leadtimes are homogeneous and demand arriving in period t is a scalar dt to be satisfied within T periods. We show that state-dependent (s, S) policies are optimal, where the state represents advance demands outside the supply leadtime horizon. We find that increasing the demand leadtime is more beneficial than decreasing the supply leadtime.
Vertical Flexibility in Supply Chains
Management Science, 2010
Principles on the benefits of manufacturing process flexibility. Management Sci. 41(4) 577-594) initiated a stream of research on supply chain flexibility, which was furthered by Graves and Tomlin (Graves, S. C., B. T. Tomlin. 2003. Process flexibility in supply chains. Management Sci. 49(7) 907-919), that examined various structures for achieving horizontal flexibility within a single level of a supply chain. In this paper, we extend the theory of supply chain flexibility by considering placement of vertical flexibility across multiple stages in a supply chain. Specifically, we consider two types of flexibilitylogistics flexibility and process flexibility-and examine how demand, production, and supply variability at a single stage impacts the best stage in the supply chain for each type of flexibility. Under the assumptions that margins are the same regardless of flexibility location, capacity investment costs are the same within and across stages, and flexibility is limited to a single stage of logistics (process) flexibility accompanied with necessary process (logistics) flexibility, we show that both types of flexibility are most effective when positioned directly at the source of variability. However, although expected profit increases as logistics flexibility is positioned closer to the source of variability (i.e., downstream for demand variability and upstream for supply variability), locating process flexibility anywhere except at the stage with variability leads to the same decrease in expected profit.
Some Properties of Decentralized Supply Chains
2005
supply chains. It generalizes existing results by broadening the class of policies and customer demand processes under consideration. The supply chain is modeled as a single-input, singleoutput control system driven by arbitrary demands. The paper discusses the appropriateness of various metrics for the bullwhip effect, and derives analytical conditions to predict its presence independently of the demand process. The paper also gives a formula for the variance of the order stream at any stage when the demand process is known and ergodic. Advance demand information (ADI) is shown to mitigate the bullwhip effect for general ordering policies.