Managing and reallocating inventory across two markets with local information

Eirini Spiliotopoulou, Karen Donohue, Mustafa Çagri Gürbüz and H. Sebastian Heese

European Journal of Operational Research, 2018, vol. 266, issue 2, 531-542

Abstract: Consider a firm that controls inventory centrally for two separate markets that are managed by regional managers having local demand information. The central planner provides a dedicated inventory level to each market, to ensure a minimum service level, but can reallocate inventory once associated demands are filled. How should such a firm solicit regional managers to share their local information so inventory levels can be set efficiently? In this paper, we study a forecast sharing game in such a firm, where demand information lies within regions and inventory is managed by a central decision maker. We show that incentives are misaligned and truthful information sharing is not an equilibrium. We study two potential ways to improve the system: a) regional managers directly place orders (rather than simply passing demand forecasts), or b) a pricing scheme for inventory reallocations is imposed. We show that under direct ordering a unique pure strategy Bayesian Nash equilibrium exists and makes retailers place orders based on their true forecasts, although the requested order quantities are not system optimal (e.g., some inventory pooling benefits are lost). Under an endogenous transfer pricing mechanism set by the central planner, we find that a first best truth telling equilibrium is possible under certain conditions. We conduct a numerical study to examine the different cases and find that when the critical fractile is high, direct ordering results in lower inventories while the reverse is true when the critical fractile is low. Expected profit comparisons show the value of local information.

Keywords: Supply chain management; Forecast sharing; Inventory commitments/reallocations; Information asymmetry; Game theory (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221717308901
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:266:y:2018:i:2:p:531-542

DOI: 10.1016/j.ejor.2017.09.042

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().