Optimization of replenishment policies for decentralized and centralized capacitated supply chains under various demands

In this paper, the optimal replenishment policies of capacitated supply chains (SC) operating under two different control strategies (decentralized vs. centralized) and various demands are determined and insights useful to management are discussed. The details of the system used, including the underlying supply chain inventory model and the simulation‐based optimization framework, are presented. The effectiveness and efficiency of the proposed optimization framework is illustrated by comparing it with brute force estimation of the true optimum on three selected scenarios. The entire study was carried out by following a design of experiment, covering ten demand patterns, four levels of capacity constraints, and two control strategies. The main and two‐factor interaction effects were analyzed via ANOVA. Detailed analyses of the ordering patterns, cost distribution over the SC and internal service level were carried out to provide useful insights. For demand with high variation, capacity constraint may lead to significant changes in ordering patterns. Failing to detect those changes may lead to unnecessary cost increase. Overall it is beneficial to adopt centralized control and cost savings realized are dependent upon the demand patterns. An incentive mechanism is proposed to coordinate the decentralized system so that each player in the SC will be better off. Additional experiments were also carried out to investigate the effect of using different allocation rules by the distributor.