Analysis of a decentralized production–inventory system

While research on decentralized supply chains has been an active area of late, this paper is among the first to consider the effects of capacity constraints on supply-chain coordination. The paper analyzes Nash and Stackelberg equilibria for a supply chain model in which production at the manufacturer is modeled as an M/M/1 make-to-stock queue. The analysis provides guidelines for setting capacity levels, determining base-stock levels, and writing contracts that complement the existing theoretical literature and also provide important practical insights. Moreover, by intentionally mimicking Cachon and Zipkin's analysis of a two-stage, Clark–Scarf model, the authors are able to isolate the impact of incorporating capacity into a supply-chain model – findings that should help stimulate further work in this direction.