Conveying Demand Information in Serial Supply Chains with Capacity Limits

Supply chains are distributed across multiple locations, and to effectively manage inventory in these channels requires knowledge of inventory levels at many sites. Such information is changing dynamically, so it is unrealistic to expect such information to be readily available, especially in channels with production capacity limits. In “Conveying Demand Information in Serial Supply Chains with Capacity Limits,” Kapuscinski and Parker show that local information alone is sufficient to effectively manage inventory in capacity-limited supply chains. In supply chains with capacity limits, the retailer does not faithfully pass the demand information to her supplier but sends censored information in her order. Despite censoring, these orders contain sufficient information for the modified echelon base-stock policy, a full-information policy, to be mimicked. They provide evidence using numerical experiments and analytical bounds that the modified echelon base-stock policy performs superbly. Also, they describe information requirements used in supply chain literature and demonstrate that with an incentive-compatible mechanism, similar to Lee and Whang (2000), local managers will follow the centralized inventory policy.