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The impact of information sharing in two-echelon supply chains
R. Nachmias and M. Kaspi
Department of Industrial Engineering and Management, Ben-Gurion University, Beer-Sheva, Israel
Information sharing in supply chains is important in order to minimize the bullwhip effect,
minimize individual organization or global supply chain costs, and improve supply chain
efficiency and consumer service levels. In order to measure the impact of information sharing, a
simple two-echelon supply chain consisting of a single retailer and a single supplier is considered.
The retailer is selling product having Poisson distributed customer demand. The supplier decides
when to start manufacturing to meet the retailer's order, in order to minimize inventory holding
costs and shortage penalty costs. Two information sharing scenarios were considered: the retailer
is not sharing any information with the supplier, and the retailer informs the supplier about its
inventory level at each time period. A numerical comparison established indicated a mean supplier
cost saving of 22% when information was shared.
infinite capacity supplier can benefit by
1. Introduction
Supply chains are an inseparable factor
sharing information of retailer inventory
in everything related to consumerism. The
levels while using a batch ordering policy,
members of the supply chain incur costs
by mean cost savings of 2.2%, with a
resulting from strong interactions with
maximum of 12.1%. Gavirneni (2006)
other chain members, and have an interest,
found that the total supply chain costs can
individually or in common with other
be reduced on average 5% and up to
members, in making as many procedures
16.3%, when information on retailer
as they are able in order to maximizing
inventory levels is shared with the supplier.
their revenues. Information sharing is one
This work considered a simple two-
way.
echelon supply chain consisting of a single
shared
retailer and single supplier. Any order from
information to improve the supplier’s order
the supplier contains a constant quantity of
quantity decisions in a serial system with a
product, and the production process time
known autoregressive demand process and
length of the retailer's order is a single time
lowered supply chain costs by about 23%.
period. The distribution time is negligible
Cachon and Fisher (2000) found that the
and there are no capacity constraints.
Lee
et
al.
(2000)
used
Nachmias and Kaspi
When a shortage appears at the retailer's
p
Shortage penalty (per single time
period and for single product).
organization, the retailer is not obligated to
supply the product later. The inventory
holding costs are paid when production is
2. Non-Information
Model
Sharing
finished before receiving an order from the
Process sequence: The retailer sells the
retailer; the shortage penalty costs are paid
product to customers. Every time period
when production is finished after receiving
(in a discrete time) the retailer surveys its
an
the
inventory. As the retailer's inventory is
production process is started immediately.
depleted, an order, having a fixed quantity
Therefore, the shortage penalty costs are
of product, is sent to the supplier. At time
paid for a single time period only. The
period
product is delivered when the order is
scheduling decision, the supplier starts
placed by the retailer and the production
manufacturing the products.
order.
process
is
As
shortage
completed.
occurs,
A
numerical
comparison for measuring the impact of
the
full
information-sharing
model
compared to the non-information-sharing
model is established.
Notations
Q
Fixed quantity of product ordered by
the retailer.

Average consumer's demand per single
time period.
Tp
Rc
Tc
Production process starting time period
(supplier decision variable on the noninformation sharing model).
The critical retailer's inventory level
triggering the start of the production
process (supplier's decision variable on
the full information sharing model).
The first time period when retailer's
inventory level equals Rc or less (on
the full information sharing model).
To
The time period when the retailer
established an order.
h
Inventory holding cost (per single time
period and for single product).
Tp ,
according
Retailer Order
Function
to
Request
supplier
Probability
Defined as PNon To . The probability of
having demand for at least Q number of
products at time period To , but not before.
Expected
Time
Sequential Orders
Length
between
Defined as ETBSONon Tp  . In the case
when the retailer's order time period
follows the production process starting
time period, the cycle ends as the order is
requested by the retailer. In the case that
the retailer’s order request time period
precedes
the
production
process
completion time, the cycle ends as the
production process is completed. In the
latter case, the production process is started
immediately when the order is requested.
Nachmias and Kaspi
Inventory Holding Cost Function
process after the order is requested.

IHC Non Tp  
probability of finishing the production
 P To  To  Tp  1  h  Q
To Tp  2
Non
Non-Information Sharing Model Total Cost Function Analysis
ETBSO Non Tp 
time periods elapsed from production
Costs
where To  Tp  1 indicates the number of
process completion until the order is
requested by the retailer. The average
Production Process Starting Time Period (Tp)
inventory holding cost per single time
period
is
generated
with
cost function is a Quasi-Convex function.
Shortage Penalty Cost Function
Tp
SPC Non Tp  
Shortage Penalty Costs
Total Costs
deviation
ETBSO Non Tp  . The inventory holding
 P To   p  Q
To 1
Inventory Holding Costs
Non
Figure (1)
Non-Information Sharing Model,
Total Cost Function.
3. Full
Information
Model
Sharing
Process sequence: The retailer sells the
products to customers. Every time period
ETBSO Non Tp 
(in a discrete time) the retailer surveys its
The average shortage penalty cost per
inventory and informs the supplier. As the
single time period is generated with
retailer's inventory is depleted, an order
deviation ETBSO Non Tp  . The shortage
request, having a fixed quantity of product,
penalty cost function is a Quasi-Convex
function.
Total Cost Function
The total cost function is a combination
of the inventory holding cost and shortage
penalty cost functions and is also seen as a
Quasi-Convex function.
is sent to a supplier. Using the information
shared, the supplier decides when to start
the production process, according to an
initially chosen critical inventory level,
Rc .
Retailer Order
Function
Defined
as:
Request
Probability
PFull Tc, To .
The
As the production process starting time
probability of having demand for at least
period Tp increases, the inventory holding
Q  Rc number of products at time period
costs decrease and the shortage penalty
Tc , but not before, along with the
costs increase, due to the later production
probability of having demand for at least
process, and therefore having a greater
Q quantity of product at time period To ,
Nachmias and Kaspi
but not before.
the critical level Rc , the retailer's inventory
Expected
Time
Sequential Orders
Length
between
level should be equal to 0 (i.e., To  Tc ).
The average shortage penalty cost per
Defined as: ETBSOFull Rc  . In the case
when the retailer's order request time
single time period is generated with the
deviation ETBSO Full Rc  .
The
shortage
period follows the production process
penalty cost function is a Quasi-Convex
starting time period, the cycle ends as the
function.
order is requested by the retailer. In the
Total Cost Function
case when the retailer’s order request time
period precedes the production process
completion time period, the cycle ends as
the production process is completed. In the
latter case, the production process is started
immediately when the order is requested.
Inventory Holding Cost Function

IHC Full ( Rc ) 

  P Tc, To  To  Tc  1  h  Q
Tc 1 To Tc  2
Full
ETBSO Full Rc 
The total cost function is a combination
of the inventory holding cost and shortage
penalty cost functions and seems to be a
Quasi-Convex function. As the critical
inventory level Rc increases, the inventory
holding cost increases and the shortage
penalty cost decreases due to the supplier
have started the production process earlier
and therefore having a greater probability
of finishing production before the order is
where To Tc  1 indicates the number of
issued.
time periods passed from starting the
Full Information Sharing Model Total Cost Function Analysis
production process until receiving an order
from the retailer. The average inventory
generated
with
the
deviation
Costs
holding cost per single time period is
ETBSO Full Rc  . The Inventory holding
Critical Inventory Level (Rc)
cost function is a Quasi-Convex function.
Shortage Penalty Cost Function
Inventory Holding Costs
Figure (2)

SPC Full ( Rc ) 
 P Tc, To  Tc   p  Q
Tc 1
Shortage Penalty Costs
Total Costs
Full Information Sharing Model;
Total Cost Function.
Full
ETBSO Full Rc 
Remark:
In
the
model
environment
defined, the first indication about the
In order to have shortage, on the first
retailer's inventory level is established only
detection of retailer's inventory level below
at the first time period. The supplier has to
Nachmias and Kaspi
consider a scheduling policy of starting the
67.91%, while in some cases there were no
production
(as
cost savings at all. Analyzing the cost
starting production at time period Tp  0
savings conclusions histogram indicates
on the non-information sharing model).
38% of the numerical comparisons resulted
During the numerical comparison this case
in no impact or a small impact, up to 5%,
is considered.
by having information sharing. The rest of
process
immediately
the examples resulted in an impact of 5%
4. Numerical Comparison
to 70% distributed Normally.
In order to measure the impact of
information sharing in the supply chain
models discussed in this work, a numerical
In The Case of Q ~~ 
The
greatest
information
sharing
impact was achieved in the case when
comparison has been analyzed.
inventory holding cost ( h ) is about the
The simulation established is based on
shortage penalty ( p ). As the difference
random environmental parameter values
and not on predetermined values (  is
between the inventory holding cost ( h )
between 0 and 10; Q is between  and
and the shortage penalty ( p ) increases, the
40; h and p are between 0 and 1), and
was replicated over 7000 times. Two cases
impact of information sharing decreases.
Generally
the
optimal
production
are distinguished; the first is the case
process schedule is at an earlier time
where the fixed quantity of product
period on the non-information sharing
ordered
average
model or at high critical inventory level on
consumer's demand (  ) (Q is less than
the full information sharing model. In the
2 ; defined as: Q ~~  ), and the second
case when the inventory holding cost ( h )
(Q )
is
about
the
is the case where the fixed quantity of
product ordered ( Q ) is significantly
greater
than
the
average
consumer's
is significantly less than the shortage
penalty ( p ), the optimal time period for
starting production ( Tp * ) converges to 0
demand (  ) ( Q is greater than 2 ;
and the optimal critical inventory level
defined as: Q   ).
( Rc * ) converges to Q or immediately (at
time
The
results
of
the
period
0),
generating
similar
numerical
scheduling on both models and therefore,
comparison indicate a mean cost savings of
the impact of information sharing is very
22.28% in the case of having information
small.
sharing. The maximum cost savings was
Nachmias and Kaspi
In The Case of Q  
cost ( h ) is significant greater than the
The largest information sharing impact
shortage penalty ( p ), the optimal time
is achieved in the case when the inventory
period for starting production ( Tp * ) is
holding cost ( h ) is less than the shortage
much greater then Q  and the optimal
penalty ( p ). Generally, as the difference
critical inventory level ( Rc * ) is less then
between the inventory holding cost ( h )
,
and the shortage penalty ( p ) increases, the
production
impact of information sharing decreases.
completed with receipt of the retailer's
generating
policies
process
will
where
the
probably be
order or having a single shortage time
In the case when the inventory holding
cost ( h ) is significantly less than the
period and, therefore, the impact of
information sharing is small.
shortage penalty ( p ), while the difference
between the fixed quantity of product
As the fixed quantity of product
ordered ( Q ) and the average consumer's
ordered ( Q ) converges to the average
demand (  ) is small, the optimal time
consumer's demand (  ), the information
period for starting production ( Tp * )
sharing impact decreases. In the case when
converges to 0 and the optimal critical
inventory level ( Rc * ) converges to Q or
immediately, generating similar scheduling
on both models and, therefore, the impact
of information sharing is very small. As
the relation between the fixed quantity of
product ordered ( Q ) and the average
the fixed quantity of products ordered ( Q )
is significantly greater than the average
consumer's demand (  ), the information
sharing impact decreases also.
5. References
[1]
Cachon Ge´rard,
Fisher Marshall.
(2000). Supply Chain Inventory Management
consumer's demand (  ) increases, the
and
optimal time period for starting production
Management Science, Vol. 46, 8, 1032–1048.
( Tp * ) increases and the optimal critical
[2]
the
value
of
Gavirneni
Shared
Information.
Srinagesh,
Roman
inventory level ( Rc * ) decreases; however,
Kapuscinski, Sridhar Tayur. (1999). Value of
the critical inventory level gives a better
information in capacitated supply chains.
prediction of the retailer's order request
Management Science, Vol. 45, 1, 16–24.
time period and, therefore, the impact of
information sharing increases.
In the case when the inventory holding
[3]
Lee Hau, So Kut, Tang Christopher.
(2000). The Value of Information Sharing in a
Two-Level
Supply
Chain.
Science, Vol. 46, 5, 626–643.
Management