Policy mechanisms for supply chain coordination

The problem is to determine a review period and stocking policy that are mu tually beneficial to a producer and a retailer. In our model, the retailer uses a periodic review, base stock policy for ordering the item from the pr oducer's Distribution Center (DC). Excess customer demand is assumed to be lost. A make-to-order production system supplies to the DC. We show that gi ven a review period, unless the manufacturer agrees to share the cost of ca rrying a fraction of the safety stocks at the retailer, the two will not ag ree upon the level of stocks to be carried in the store. We prove that ther e is an equilibrium value for this fraction, such that the retailer and the manufacturer are always in agreement with regard to the stocking level. We then show that complete coordination on the stocking level as well as the review period can be achieved solely through carrying out negotiations on c redit terms. These theoretical results are used to construct an algorithm f or calculating the optimal policy parameters for a supply chain. As part of the analysis we suggest a modification of the base stock policy for the po sitive lag lost sales case of periodic review inventory models that consist ently outperforms the base stock policy in our numerical studies.