A coordination framework for supply chain inventory alignment

Abstract

Purpose A traditional supply chain, all too often, is a sequence of weakly connected activities both within and outside the organization and leads to many misalignments. Tackling this inherent lack of coordination is a major value creation opportunity for supply chain managers. This paper aims to present a coordination framework, called ASCEND, to align the inventory decisions in decentralized supply chains. Design/methodology/approach The framework rests on three pillars – multi‐agent technology, coordination theory, and optimization technology. Inventory alignment is transformed into a decentralized constraint satisfaction optimization problem, which is then solved using a genetic algorithm‐based coordination process. The guiding principle of this framework is the establishment of a proper incentive alignment mechanism through cost‐sharing and service level contracts, taking into account the associated dependencies. Findings The results of the pilot study indicate that the coordination framework reduces the supply chain inventory‐holding cost, compared with the “as‐is” scenario. Interestingly, the results also indicate that not all the supply chain partners will experience lower inventory costs in the absence of a proper incentive alignment mechanism. Only through cost sharing and service level contracts can the value of coordination be realized by each partner in a supply chain network! Practical implications The coordination approach is applied to a pilot supply chain. The results of the case study lead to 10.4 percent (average) reduction in supply chain inventory‐holding costs, validating the efficacy of the coordination framework. Originality/value This research has resulted in the development of a supply chain coordination framework, which requires the establishment of a proper incentive alignment mechanism, based on cost‐sharing and service level contracts, and taking into account the associated dependencies.