The multi-item replenishment problem in a two-echelon supply chain: the effect of centralization versus decentralization

This paper deals with a joint replenishment arrangement with a two-echelon supply chain, having one supplier or manufacturer and one buyer or retailer, facing a deterministic demand and selling a number of products in the marketplace. We considered a situation involving a family of products sharing a common production facility, in which there is a major setup cost for each production run and an item-specific minor processing cost for each item being added into production. The retailer also has major setup costs due to economies of scale in transportation and distribution expenses and an item-specific minor setup cost for each additional item involved in the order. In such a setting, it seemed as if it would be economically beneficial for both parties to enter into a joint replenishment arrangement. We proposed both centralized and decentralized decision models to determine the best solution to minimize costs. We proved the optimal properties of the models, developed a search algorithm and numerically illustrated the benefits generated from such an arrangement. In addition, we have proposed a profit sharing mechanism through a well-known quantity discount scheme, so that potential Pareto improvements may be achieved among the participants of a coordinated supply chain.