Benefits of co-operation in a production distribution environment

We model co-operation in a typical production distribution setting that contains one capacitated supplier producing and distributing a single product to many identical retailers who are facing i.i.d, end-item demands from the consumers. We consider three inventory allocation mechanisms, representing varying degrees of co-operation, at the supplier: (1) the orders from the retailers are filled in a predetermined sequence; (2) the orders from the retailers are filled after taking into account their current inventories; and (3) the orders from the retailers are filled assuming that the product can also be shipped from one retailer to another. We estimate the benefits due to co-operation in this supply chain and study the effect of various system parameters on these benefits. An extensive computational study indicated that the benefits of co-operation in this production distribution environment decrease with increase in the supplier capacity, increase in the number of retailers, decrease in penalty cost, and decrease in consumer demand variance. (C) 2001 Elsevier Science B.V. All rights reserved.