TWO-ECHELON PRODUCTION INVENTORY SYSTEMS WITH STRATEGIC CUSTOMERS

Abstract

AbstractWe consider a two-echelon production inventory system with a manufacturer having limited production capacity and a distribution center (DC). There is a positive transportation time between the manufacturer and the DC. Customers gain a value by receiving the product and incur a waiting cost when facing a delay. We assume that customers' waiting cost depends on their degree of impatience with respect to delay, which is captured by a convex waiting cost function. Customers are strategic with respect to joining the system and either place an order or balk from the system upon their arrival depending on their expected waiting time. We study the Stackelberg equilibrium assuming that the DC acts as a Stackelberg leader and customers are the followers. We first obtain the total expected revenue and then provide a heuristic to derive the optimal base-stock levels in the warehouse and the DC as well as the optimal price of the product.