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Inventory Management: Information, Coordination, and Rationality

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Planning Production and Inventories in the Extended Enterprise

Part of the book series: International Series in Operations Research & Management Science ((ISOR,volume 151))

Abstract

1Throughout the chapter, we use the terms inventory/production,​ control,​ replenishment/production, and order/produce interchangeably.

Inventory control problems have attracted researchers for many years1. Fundamentally, the problem is one of matching supply and demand by efficiently coordinating the production and the distribution of goods. Recent developments in information technology have equipped managers with the means to obtain better and timely information regarding, for example, demand, lead times, available assets, and capacity. Technology has also enabled customers to obtain vast amounts of information about a product, such as its physical attributes and availability. In today’s increasingly competitive marketplace, consumers are constantly pressuring suppliers to simultaneously reduce costs and lead times and increase the quality of their products. Good inventory management is no longer a competitive advantage. It is an essential capability to survive in a global market.

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Notes

  1. 1.

    A function \(g:\mathcal{R}\rightarrow \mathcal{R}\) is coercive if lim|x|→∞g(x)=∞.

  2. 2.

    It is often assumed that leftover inventory at the end of the planning horizon T is salvaged for c T+1 per item. Veinott (1965) shows that the inventory control problem with linear salvage value can be converted into an equivalent problem with zero salvage. Here we report the result of this conversion.

  3. 3.

    Notice that the manager controls replenishment decisions to minimize inventory-related costs given an exogenous demand process. In certain cases, the manager may be able to adjust prices to shape demand at each period. This requires an inventory manager to have control over both replenishment and pricing decisions. For more discussion on this topic, we refer the reader to the reviews by Bitran and Caldentey (2003), Elmaghraby and Keskinocak (2003) and to a more recent paper by Huh et al. (2008).

  4. 4.

    An inventory problem is said to be stationary if the cost and demand distributions are time invariant.

  5. 5.

    We use the terms increasing and decreasing in the weak sense. Increasing means nondecreasing.

  6. 6.

    The manufacturer may carry out some value added operations that cost, say m per unit. She sells at a fixed unit price r′>0. So her effective sales price is \(r = r' - m\). Hence, without loss of generality, we assume m=0. Of course, the story would be different if the manufacturer was building to stock as we will discuss in Sect.13.3.2.

  7. 7.

    The payback contract provides a reward mechanism that induces the supplier to secure more capacity. Another mechanism is to penalize the supplier for every unit of order that he is unable to satisfy due to capacity shortage.

  8. 8.

    In this literature, mainly the downstream firm is assumed to face demand uncertainty, while the upstream firm “builds to order”, unlike the interaction discussed in this section. Nevertheless, the results are analogous.

  9. 9.

    Similar alternative sourcing strategies are also discussed in Lee et al. (2000) and Graves and Willems (2000).

  10. 10.

    When \(f(x,y) - f(x,y - 1)\) is increasing in x, then function f is said to satisfy single crossing property.

  11. 11.

    Decoupling stock is used to permit separation of inventory decisions at different locations in the supply chain. Having a large inventory between two locations would make it possible for the downstream location to make an inventory decision independent of any supply problem at the upstream location.

  12. 12.

    This problem is a simple single period, single-location inventory control problem faced by a newsvendor. The vendor has to decide how much to order from the publisher so as to satisfy uncertain demand. The model is used to teach the risk of overstocking and understocking.

  13. 13.

    The gap is defined as percentage difference between the optimal cost and the cost of the heuristic.

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Acknowledgment

The authors research has been partially supported by National Science Foundation Grant No. 0556322. This chapter was written in 2006 when the author was a faculty member at the department of Management Science and Engineering at Stanford University.

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  1. Columbia University, New York, NY, 10027, USA

    Özalp Özer

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  1. Decision Technologies, Intel Corporation, W. Chandler Blvd. 5000, Chandler, 85226, Arizona, USA

    Karl G. Kempf

  2. School of Industrial &, Systems Engineering, Georgia Institute of Technology, Ferst Drive NW., 765, Atlanta, 30332-0205, Georgia, USA

    Pınar Keskinocak

  3. , Edward P. Fitts Department of Industrial, North Carolina State University, Daniels Hall 300, Raleigh, 27695, North Carolina, USA

    Reha Uzsoy

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Özer, Ö. (2011). Inventory Management: Information, Coordination, and Rationality. In: Kempf, K., Keskinocak, P., Uzsoy, R. (eds) Planning Production and Inventories in the Extended Enterprise. International Series in Operations Research & Management Science, vol 151. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-6485-4_13

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