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Production and availability policies through the Markov Decision Process and myopic methods for contractual and selective orders

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  • Chao, Gary H.
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    Abstract

    In this paper, we consider a supply chain with one manufacturer, one retailer, and some online customers. In addition to supplying the retailer, manufacturers may selectively take orders from individuals online. Through the Markov Decision Process, we explore the optimal production and availability policy for a manufacturer to determine whether to produce one more unit of products and whether to indicate “in stock” or “out of stock” on website. We measure the benefits and influences of adding online customers with and without the retailer’s inventory information sharing. We also simulate the production and availability policy via a myopic method, which can be implemented easily in the real world. Prediction of simple switching functions for the production and availability is proposed. We find the information sharing, production capacity and unit profit from online orders are the primary factors influencing manufacturer profits and optimal policy. The manufacturer might reserve 50% production capacity for contractual orders from the retailer and devote the remaining capacity to selective orders from spontaneous online customers.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0377221712007321
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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 225 (2013)
    Issue (Month): 3 ()
    Pages: 383-392

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    Handle: RePEc:eee:ejores:v:225:y:2013:i:3:p:383-392

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Supply chain management; Information-sharing; Markov Decision Process; Production/availability policy;

    References

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    1. Gérard P. Cachon & Marshall Fisher, 2000. "Supply Chain Inventory Management and the Value of Shared Information," Management Science, INFORMS, vol. 46(8), pages 1032-1048, August.
    2. Andrew J. Clark & Herbert Scarf, 1960. "Optimal Policies for a Multi-Echelon Inventory Problem," Management Science, INFORMS, vol. 6(4), pages 475-490, July.
    3. Albert Y. Ha, 1997. "Inventory Rationing in a Make-to-Stock Production System with Several Demand Classes and Lost Sales," Management Science, INFORMS, vol. 43(8), pages 1093-1103, August.
    4. Guan, Ruoxi & Zhao, Xiaobo, 2010. "On contracts for VMI program with continuous review (r, Q) policy," European Journal of Operational Research, Elsevier, vol. 207(2), pages 656-667, December.
    5. Lode Li, 2002. "Information Sharing in a Supply Chain with Horizontal Competition," Management Science, INFORMS, vol. 48(9), pages 1196-1212, September.
    6. Srinagesh Gavirneni & Roman Kapuscinski & Sridhar Tayur, 1999. "Value of Information in Capacitated Supply Chains," Management Science, INFORMS, vol. 45(1), pages 16-24, January.
    7. Fangruo Chen, 1998. "Echelon Reorder Points, Installation Reorder Points, and the Value of Centralized Demand Information," Management Science, INFORMS, vol. 44(12-Part-2), pages S221-S234, December.
    8. Lode Li, 2002. "Information Sharing in a Supply Chain with Horizontal Competition," Yale School of Management Working Papers ysm288, Yale School of Management.
    9. Edward Ignall & Arthur F. Veinott, Jr., 1969. "Optimality of Myopic Inventory Policies for Several Substitute Products," Management Science, INFORMS, vol. 15(5), pages 284-304, January.
    10. Leroy B. Schwarz & Linus Schrage, 1975. "Optimal and System Myopic Policies for Multi-Echelon Production/Inventory Assembly Systems," Management Science, INFORMS, vol. 21(11), pages 1285-1294, July.
    11. Chen, Jing, 2011. "The impact of sharing customer returns information in a supply chain with and without a buyback policy," European Journal of Operational Research, Elsevier, vol. 213(3), pages 478-488, September.
    12. Teunter, Ruud H. & Klein Haneveld, Willem K., 2008. "Dynamic inventory rationing strategies for inventory systems with two demand classes, Poisson demand and backordering," European Journal of Operational Research, Elsevier, vol. 190(1), pages 156-178, October.
    13. Srinagesh Gavirneni, 2002. "Information Flows in Capacitated Supply Chains with Fixed Ordering Costs," Management Science, INFORMS, vol. 48(5), pages 644-651, May.
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