A generalized order-up-to policy and altruistic behavior in a three-level supply chain

In “Supply Chain Management and Knowledge Management: Integrating Critical Perspectives in Theory and Practice”, edited by A. Dwivedi and T. Butcher, Palgrave Macmillan, 190–216. ISBN: 978-0-230-57343-7.

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Abstract

Assuming a stochastic external market demand, this research studies the benefit of the order coordination in a serially linked three-level supply chain. Each player’s cost is represented by the infinite horizon standard deviation of the end of period net stock levels. To represent the activity of a player in a supply chain, the generalized order-up-to policy proposed by Hosoda and Disney (2006) is exploited. It is shown that to minimize the total supply chain cost, the attitude of the first level player to cost increases is essential. This type of order coordination is called altruistic behaviour herein and can produce a large cost reduction (more than 20%) to the overall supply chain. A coordination model which may be more applicable in practical settings is also introduced with this benefit.