A Collaborative Decentralized Distribution System with Demand Forecast Updates

European Journal of Operational Research, Vol. 216, pp. 573-583, 2012

40 Pages Posted: 13 Sep 2006 Last revised: 27 Jun 2016

See all articles by Ulas Ozen

Ulas Ozen

Ozyegin University / Faculty of Business

Greys Sosic

University of Southern California - Marshall School of Business

Marco Slikker

Eindhoven University of Technology (TUE) - School of Industrial Engineering

Date Written: April 7, 2010

Abstract

In this paper, we study inventory pooling coalitions within a decentralized distribution system consisting of a manufacturer, a warehouse (or an integration center), and n retailers. At the time their orders are placed, the retailers know their demand distribution but do not know the exact value of the demand. After certain production and transportation lead time elapses, the orders arrive at the warehouse. During this time, the retailers can update their demand forecasts.

We first focus on cooperation among the retailers - the retailers coordinate their initial orders and can reallocate their orders in the warehouse after they receive more information about their demand and update their demand forecasts. We study two types of cooperation: forecast sharing and joint forecasting. We show that the cooperative games associated with both situation have non-empty cores. However, by using an example we illustrate how forecast sharing collaboration might lead to bad performance, and asymmetric forecasting capabilities of the retailers might harm the cooperation. On the other hand, joint forecasting always results in higher total expected profit.

Finally, we analyze the impact that cooperation and non-cooperation of the retailers has on the manufacturer's profit. We focus on coordination of the entire supply chain through a three- parameter buyback contract. We show that our three-parameter contract can coordinate the system if the retailers have symmetric margins. Moreover, under such a contract the manufacturer prefers retailers' cooperation since he can get a share of improved performance.

Keywords: inventory centralization, coordination, game theory, core

JEL Classification: C71

Suggested Citation

Ozen, Ulas and Sosic, Greys and Slikker, Marco, A Collaborative Decentralized Distribution System with Demand Forecast Updates (April 7, 2010). European Journal of Operational Research, Vol. 216, pp. 573-583, 2012, Available at SSRN: https://ssrn.com/abstract=929652 or http://dx.doi.org/10.2139/ssrn.929652

Ulas Ozen

Ozyegin University / Faculty of Business ( email )

Greys Sosic (Contact Author)

University of Southern California - Marshall School of Business ( email )

Bridge Hall 308
Los Angeles, CA California 90089
United States

Marco Slikker

Eindhoven University of Technology (TUE) - School of Industrial Engineering ( email )

P.O. Box 513
5600 MB Eindhoven
Netherlands

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