The Value of Information Sharing in a Two-Level Supply Chainby Lee, So and Tang

Emrah Zarifoğlu97021730

Sharing Demand Information

Bullwhip effect (Lee et al) Demand information sharing,

summary of POS, between Wall Mart and Johnson and Johnson, Lever Brothers, (Gill and Abend)

VMI, CRP at Campbell Soup and Barilla (Clark), (Hammond)

Intent of the Paper Model of two-stage

supply chain –retailer and manufacturer

Benefit of information sharing to the chain

Very significant benefit to the manufacturer alone

numerical example –to show manufacturer’s great savings by

High demand correlation

High demand variance within each period

Long lead times Especially useful in

the high-tech industry

Quantifying the Value of Information Sharing Unsynchronized review period of

manufacturer with retailer causes order review time order replenishment decision by use of retailer’s inventory level (Bourland et al.)

Manufacturer’s benefit from inventory information sharing of retailers using batch order policy (Cachon and Fisher)

Manufacturer has limite capacity, etc... (Gavirneni et al.)

Aim of the Paper

This paper examines the impact of the auto correlation coefficient and the leadtime on the benefit of information sharing in a two-stage supply chain

Model Simple two-level supply chain –one

manufacturer and one retailer Autocorrelated AR(1) demand process Dt = d + ρDt-1 + εt

Dt: demand at retailer at period t ρ: correlation coefficient εt: iid ~ N(0, σ2)

Model (Cont’d) Periodic review –replenishment from

retailer to manufacturer each period Backlog allowed Order: Yt realization at t+l+1 Resupplying allowed, guaranteed

order by manufacturer Order-up-to policy by manufacturer

and retailer

Retailer’s Ordering:

Order at period t: Yt = Dt + (St – St-1)

Total demand over lead time:

Retailer’s Ordering (Cont’d)

Conditional expectation and conditional variance of total demand over lead time:

Retailer’s Ordering (Cont’d)

Order-up-to level:

Ordering quantity:

Yt ≥ 0 for ρ > 0

Manufacturer’s Ordering

Aware of retailer’s demand process Order at t realization at t + L +

1 Recursive equations for retailer’s

order:

Manufacturer’s Ordering (Cont’d) Total shipment quantity over manufacturer’s

lead time for any given value of retailer’s order at period t:

Manufacturer’s Ordering (Cont’d)

No Information Sharing: Total shipment quantity over

manufacturer’s lead time : Ft ~ N(Mt, Vσ2)

Optimal order-up-to level:

Manufacturer’s Ordering (Cont’d)

Information Sharing: Total shipment quantity over

manufacturer’s lead time : F`t ~ N(M`t, V`σ2)

Optimal order-up-to level:

Benefits of Information Sharing

Retailer’s cost not affected Benefit is high if

Demand autocorrelation is high Demand variability is high

Inventory Reduction

Approximation for average (on-hand) inventory:

Approximation for average (on-hand) inventory depending on parameters:

Inventory Reduction (Cont’d) Reduction in inventory:

Percentage inventory reduction:

Increasing in autocorrelation coefficient

Increasing in coefficient of variation of underlying demand

Increasing by K (shortage cost P is high relative to holding cost H)

Expected Cost Reduction Using a loss function and convexity

Expected cost with information sharing is less than expected cost with no information sharing

Impact of Demand Process Characteristics

Numerical example to analyze goodness of approximation of average inventory

Compared to a simulation

Impact of Demand Process Characteristics (Cont’d) Simulated results very close to

approximation (within 5%) Reduction in inventory by information

sharing ρ larger reduction in inventory larger

by information sharing Complex demand is suitable for these

results (high-tech industry, grocery industry)

Impact of Demand Process Characteristics (Cont’d) Give incentive to retailer to share its data Financial scheme to reduce retailer’s variable

cost Price reduction Better return policy Better payment terms etc...

Operational scheme to reduce retailer’s overhead, processing and inventory costs

VMI Reduce retailer’s leadtime

Impact of Lead Time Affects manufacturer’s logistic,

inventory holding and shortage costs

Benefit for both Reduce both inventory levels l larger reduction in

manufacturing inventory due to information sharing is larger

Numerical example

Impact of Lead Time (Cont’d) Decrease in retailer’s cost sharply Decrease in manufacturer’s cost slightly Information sharing offers additional

cost saving to manufacturer not much variable wrt l

No direct benefit to retailer by information sharing

Implementation of information sharing and leadtime reduction provides benefit for both

Impact of Lead Time (Cont’d)

L larger cost savings to the manufacturer larger (by information sharing)

Future Research Directions

Focus on multiple retailers instead of a single retailer

Comparison of benefits of information sharing with VMI programs