Value of Information in Capacitated Supply Chains

TLDR

The study investigates the impact of incorporating information flow between a supplier and retailer in a capacitated two‑echelon supply chain. The authors model three scenarios—no supplier information beyond past data; supplier knowledge of the retailer’s (s, S) policy and demand distribution; and full knowledge of the retailer’s state—and estimate the resulting supplier savings. Order‑up‑to policies remain optimal under all considered information‑flow scenarios for finite, discounted infinite, and average‑cost horizons.

Abstract

We incorporate information flow between a supplier and a retailer in a two-echelon model that captures the capacitated setting of a typical supply chain. We consider three situations: (1) a traditional model where there is no information to the supplier prior to a demand to him except for past data; (2) the supplier knows the (s, S) policy used by the retailer as well as the end-item demand distribution; and (3) the supplier has full information about the state of the retailer. Order up-to policies continue to be optimal for models with information flow for the finite horizon, the infinite horizon discounted and the infinite horizon average cost cases. Study of these three models enables us to understand the relationships between capacity, inventory, and information at the supplier level, as well as how they are affected by the retailer’s (S − s) values and end-item demand distribution. We estimate the savings at the supplier due to information flow and study when information is most beneficial.