The incremental value of central control in serial supply chains

Abstract

We consider a two-echelon serial supply chain where a single manufacturer replenishes a single downstream customer who faces random, stationary and discrete demand. In this setting, we compare the performance of a traditional supply chain having no information sharing to one where the customer shares demand and inventory information with the manufacturer. We also consider the case of central control where the manufacturer has full control over replenishments. This full information sharing with control by the manufacturer captures what has been called a vendor-managed inventory scenario in the literature. In order to estimate the performance of these three supply chain scenarios, we utilise renewal theory to develop probability models for each. A computational analysis of the models determines the benefit which information sharing offers as well as the incremental benefit central control provides beyond that of information sharing alone, a value which has not typically been considered in the literature despite its importance. Results indicate central control offers a 4.0% improvement over the no-information sharing setting; however, information sharing alone accounts for some of that benefit, offering an average cost savings of 1.8% compared to the no-information sharing setting. We then conclude that central control offers only an additional 2.2% benefit over the information sharing setting.Keywords: supply chain management; vendor-managed inventory; value of information; central control IntroductionFirms have traditionally made their own inventory control decisions, including the timing of shipments and order quantities. However, a great deal of value may be obtained if a firm coordinates and shares information with its supply chain partners as it enables better decision-making with regards to ordering and production planning (Chan and Chan 2010). The academic literature has investigated such partnerships to determine the benefit offered but findings are often inconsistent (Cachon and Fisher 2000;Li and Wang 2007). For example, Gavirneni, Kapuscinski, and Tayur (1999) report that sharing information on the retailer's ordering policy and point-of-sale data can improve system performance by 1-35%. Fry, Kapuscinski, and Olsen (2001) found that costs could be reduced by up to 23%. In contrast, Chen (1998) reports more conservative results, finding that the benefit of using demand information and echelon stock policies leads to an average benefit of only 1.75%, while Cachon and Fisher (2000) found savings of approximately 2.2%.There are several reasons for the wide range of results found in studies which investigate the value of information combined with the use of centralised control. The most obvious reasons are the structure of the supply chain being investigated, the replenishment logic employed and the parameter levels used in the mathematical and simulation models (Gavirneni 2001). Studies in this area have typically established the value of information by comparing a model having full information sharing to a ...

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