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Decentralized Supply Chains Subject to Information Delays

  • Fangruo Chen

    (Graduate School of Business, Columbia University, New York, New York 10027)

We consider a supply chain whose members are divisions of the same firm. The divisions are managed by different individuals with only local inventory information. Both the material and information flows in the supply chain are subject to delays. Under the assumption that the division managers share a common goal to optimize the overall performance of the supply chain (i.e., they act as a team), we characterize the optimal decision rules for the divisions. The team solution reveals the role of information leadtimes in determining the optimal replenishment strategies. We then show that the owner of the firm can manage the divisions as cost centers without compromising the systemwide performance. This is achieved by using an incentive-compatible measurement scheme based on accounting inventory levels. Finally, we investigate the impact of irrational behavior on supply chain performance and demonstrate that it is important for the upstream members of the supply chain to have access to accurate customer demand information.

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File URL: http://dx.doi.org/10.1287/mnsc.45.8.1076
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 45 (1999)
Issue (Month): 8 (August)
Pages: 1076-1090

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Handle: RePEc:inm:ormnsc:v:45:y:1999:i:8:p:1076-1090
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  1. Milgrom, Paul & Roberts, John, 1988. " Communication and Inventory as Substitutes in Organizing Production," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 275-89.
  2. James P. Monahan, 1984. "A Quantity Discount Pricing Model to Increase Vendor Profits," Management Science, INFORMS, vol. 30(6), pages 720-726, June.
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  8. Kandel, Eugene, 1996. "The Right to Return," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 329-56, April.
  9. Srinagesh Gavirneni & Roman Kapuscinski & Sridhar Tayur, 1999. "Value of Information in Capacitated Supply Chains," Management Science, INFORMS, vol. 45(1), pages 16-24, January.
  10. Hau Lee & Seungjin Whang, 1999. "Decentralized Multi-Echelon Supply Chains: Incentives and Information," Management Science, INFORMS, vol. 45(5), pages 633-640, May.
  11. Jehoshua Eliashberg & Richard Steinberg, 1987. "Marketing-Production Decisions in an Industrial Channel of Distribution," Management Science, INFORMS, vol. 33(8), pages 981-1000, August.
  12. 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.
  13. repec:inm:ormnsc:v:30:y:1984:i:12:p:1524-1539(2 is not listed on IDEAS
  14. Rema Hariharan & Paul Zipkin, 1995. "Customer-Order Information, Leadtimes, and Inventories," Management Science, INFORMS, vol. 41(10), pages 1599-1607, October.
  15. GĂ©rard P. Cachon & Paul H. Zipkin, 1999. "Competitive and Cooperative Inventory Policies in a Two-Stage Supply Chain," Management Science, INFORMS, vol. 45(7), pages 936-953, July.
  16. John D. Sterman, 1989. "Modeling Managerial Behavior: Misperceptions of Feedback in a Dynamic Decision Making Experiment," Management Science, INFORMS, vol. 35(3), pages 321-339, March.
  17. Hau L. Lee & V. Padmanabhan & Seungjin Whang, 1997. "Information Distortion in a Supply Chain: The Bullwhip Effect," Management Science, INFORMS, vol. 43(4), pages 546-558, April.
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