Channel coordination with the newsvendor model using asymmetric information |
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Authors: | Pé ter Egri,Jó zsef Vá ncza |
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Affiliation: | a Fraunhofer Project Center for Production Management and Informatics, Computer and Automation Research Institute, Hungarian Academy of Sciences, Kende u. 13-17, 1111 Budapest, Hungary b Department of Manufacturing Science and Technology, Budapest University of Technology and Economics, H-1111 Budapest, Egry József u.1., Hungary |
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Abstract: | In this paper, after surveying short-term two-echelon supply channel coordination methods, we present an extended version of the newsvendor model in which the supplier has to fulfil all demand of the customer, even if this calls for an additional setup of production. Given uncertain demand forecast, the solution is an optimal production quantity that minimises the expected total cost including setup, inventory holding and obsolete inventory costs. Then, the model is studied in a decentralised setting where the customer has private information about the demand forecast, while the supplier knows the various cost factors. We suggest such a coordination protocol and payment scheme that provides both partners the right incentive for minimising the total cost: the customer is interested in sharing her unbiased demand forecast and uncertainty, while the supplier's rational decision concurs with the overall optimum. Hence, local decisions based on asymmetric information coordinate the channel in the global sense. The results are also demonstrated by taking some real-life test cases from an industrial study that motivated our work. |
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Keywords: | Newsvendor Channel coordination Asymmetric information Service level Compensation |
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