Production Smoothing and Cost Performance in a Production-inventory System

Anotace: This paper considers a decentralized two-echelon supply chain: a single retailer holds finished goods inventory to meet customer demand and a single manufacturer produces the retailer’s replenishment orders for a single item on a make-to-order basis. The finite production capacity in each period is considered. The manufacturer operates close to this production capacity. In this setting, the retailer’s order decision has a direct impact on the manufacturer’s production utilization. Most inventory-focused literature research control inventory levels and allow production levels to vary substantially each period. The manufacturer, however, prefers a stable level of production, i.e. a smooth order pattern from the retailer. Competitiveness of a supply chain is set by its performance as a whole. In a decentralized chain, each link focuses on its own interests. Can the supplier pursuing his/her own goals improve the performance of the whole chain? In this paper, we explore the effects of production smoothing on total system per-unit costs while considering inventory as well as production related costs.