Optimizing inventory policy for products with time‐sensitive deteriorating rates in a multi‐echelon supply chain

Many industries with multiple‐echelon supply chains suffer inventory management with costly deteriorating rates changed along with the time, such as TFT‐LCD panel manufacturing industry, IC manufacturing industry, and agricultural industry, to name a few. In addition, highly competitive pressures in business force firms to develop their partnership through strategic alliances. This study assumes that product deterioration is time‐sensitive and develops an optimal integrated inventory policy for time‐sensitive deteriorating products by taking into account a strategic alliance for a three‐echelon supply chain (one producer, one distributor, and one retailer). This study empirically investigates how different deterioration rates in each echelon affect performances of individuals and integrated inventory policies. Sensitivity analysis is given to justify that the impact of changes in deterioration rates of each echelon is significant and the joint cost of the proposed integrated inventory policy is found to be much less than the individual policies. In addition, a compensation policy is applied to evaluate cost reduction and benefit losses under different individual policies. Through the proposed coordination mechanism, the timing and quantities of deliveries can be determined optimally in cooperation with up‐/down‐stream members to achieve a minimum overall cost. Furthermore, the proposed integrated inventory policy can contribute to a significant cost reduction of such supply chains, and facilitate strategic alliance among the parties in the supply chain.