Periodic flexibility, information sharing, and supply chain performance

A two-stage serial supply chain in which a retailer and his supplier are operating in make-to-stock environments and the retailer faces uncertain demands from the end-customers is studied. When this supply chain is centrally managed, the optimal policy is an extension of the Clark-Scarf echelon base stock policy. Since these supply chains are usually operated in a decentralized manner, an operational change is proposed that reduces the inefficiency associated with decentralization. The policy, which is called Periodic Flexibility (PF), provides the retailer with structural flexibility to order any amount in one period of a cycle, while requiring that the retailer receives a fixed-quantity shipment in the other periods. Optimal policies and their associated costs for the non-stationary inventory control problems faced by the retailer and the supplier under PF are characterized. A detailed computational study shows that PF improves the supply chain performance by about 11% on average. This improvement is a 43% (on average) reduction in the efficiency gap between centralized and decentralized control. The improvement of PF is due to information sharing, i.e., the retailer passing her end-customer demand information to the supplier. The PF strategy is compared to the well-known quantity flexibility scheme and it is shown that the PF approach tends to be more efficient.