A single-vendor single-manufacturer integrated inventory model with stochastic demand and variable production rate

This paper investigates an alternative way to react to demand uncertainty in an integrated inventory model, namely the variation of the production rate that enables the manufacturer to reduce lead times and the corresponding demand uncertainty. To investigate the impact of variable production rates on the supply chain, this paper considers a single-vendor single-manufacturer integrated inventory model where the vendor ships finished products in multiples of full truckloads to the manufacturer. The objective of the model is to coordinate both production and distribution of the product in such a way that the total costs of the supply chain are minimized. A solution procedure is suggested, and the behaviour of the model is analysed in numerical examples. Obviously, the total supply chain cost is reduced when the manufacturer's production rate is included as a decision variable in the model. These savings can generally benefit both the vendor and the manufacturer. However, in situations where coordinated decision making is initially not beneficial to the vendor, the supply chain members can benefit from a revenue sharing contract that supports the sharing of the total savings. The model proposed in the paper at hand supports both the determination of an optimal production rate as well as the distribution of coordination benefits among the supply chain members.