Supply Chain With Inventory Review and Dependent Demand Distributions: Dynamic Inventory Outsourcing

In this paper, we consider inventory outsourcing by a producer to a distributor. The distributor charges a cost for each unit it handles and the manufacturer responds with a production and inventory policy over a finite contract period. As a result, the two parties enter a noncooperative differential game. We address the effect of information asymmetry in such a game under a stochastic demand when the inventory level can only be observed by the manufacturer intermittently. Note to Practitioners-We demonstrate that even for the seemingly simple one-part-type system with a single inventory review, the inclusion of the random demand still leads to a nontrivial optimal production control for the manufacturer. As to the distributor, his charge for handling manufacturer's inventories is determined by his leadership in the supply chain and depends on the remaining number of periods to go. While the desire to charge as much as possible for handling inventories at the last period prevails, the distributor reduces the charge when there are two periods to go.