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TWO-ECHELON PRODUCTION INVENTORY SYSTEMS WITH STRATEGIC CUSTOMERS

Published online by Cambridge University Press:  27 September 2019

Ata G. Zare ,
Hossein Abouee-Mehrizi Open the ORCID record for Hossein Abouee-Mehrizi [Opens in a new window]  and
Oded Berman
Ata G. Zare
Affiliation:
Department of Management Sciences, University of Waterloo, Waterloo, ON, N2L 3G1, Canada E-mail: aghareha@uwaterloo.ca, haboueemehrizi@uwaterloo.ca
Hossein Abouee-Mehrizi
Affiliation:
Department of Management Sciences, University of Waterloo, Waterloo, ON, N2L 3G1, Canada E-mail: aghareha@uwaterloo.ca, haboueemehrizi@uwaterloo.ca
Oded Berman
Affiliation:
Rotman School of Management, University of Toronto, Toronto, ON, M5S 3E6, Canada E-mail: Berman@rotman.utoronto.ca
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Abstract

We 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.

Keywords

risk aversionStackelberg equilibriumstrategic behaviortwo-echelon inventory system
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 35 , Issue 2 , April 2021 , pp. 258 - 275
Copyright
Copyright © Cambridge University Press 2019

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