Pooling and Dependence of Demand and Yield in Multiple-Location Inventory Systems

Ho-Yin Mak; Zuo-Jun (Max) Shen

doi:10.1287/msom.2013.0469

Pooling and Dependence of Demand and Yield in Multiple-Location Inventory Systems

Ho-Yin Mak¹; Zuo-Jun (Max) Shen²

¹ Department of Industrial Engineering and Logistics Management, The Hong Kong University of Science and Technology, Kowloon, Hong Kong · ² Department of Industrial Engineering and Operations Research, University of California, Berkeley, Berkeley, California 94720

Manufacturing and Service Operations Management 2014

The benefits of inventory risk pooling are well known and documented. It has been proven in the literature that the expected costs of a centralized system are increasing in the degree of (positive) dependence of demand in an idealized newsvendor setting. Using the supermodular stochastic order to characterize dependence, we study a general two-tiered supply chain structure, in which both demand and supply yields are random, and prove that the expected costs are increasing in the degrees of positive dependence between demand and supply yield loss factors. Furthermore, using a distributionally robust optimization framework, we prove an analogous result for the case where demand and yield distributions are not precisely known.

DOI: 10.1287/msom.2013.0469
Volume: 16 (2)
Pages: 263-269
Language: en
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