A Supply Chain Coordination Mechanism for Common Items Subject to Failure in the Electronics, Defense, and Medical Industries

Abstract

Improved production processes, particularly miniaturization, have led to the development and use of non-reworkable items subject to failure in modern production environments. Coordinating supply chains for these items requires cooperation between suppliers and buyers in order to balance ordering/setup and holding costs among system partners. In this paper, we first determine optimal inventory policies for both the supplier and buyer. We then apply the bisection method to develop a mechanism which uses a common replenishment time to coordinate a supply chain consisting of a single supplier and n buyers. By utilizing this optimization framework, we minimize total system-wide costs and derive the cost savings associated with our coordinated solution. Numerical examples are then provided for illustration.