A numerical analysis of supply chain performance under split decision rights

Abstract

We examine periodic review supply chain models where order quantity and shipping frequency are both decision variables and decision-making rights are split between supply chain agents. We address two general questions: (1) when does decentralized decision making result in the greatest loss in supply chain performance; and (2) what effect does the distribution of channel power have on performance loss. We characterize optimal policies where possible in each scenario and we use numerical analysis to generate insights. We find that performance losses from decentralized control are somewhat limited in our results due to risk pooling and that the magnitude of performance loss is strongly influenced by the relative holding and penalty costs, but somewhat invariant to demand uncertainty. Furthermore, we find that concentrating channel power with the supplier can lead to supply chain profits that are very close to a centralized scenario, but also results in lower customer service levels.