Effectiveness of consignment stock policy in a three-level supply chain

The paper studies a three‐level supply chain having one supplier, one vendor and multiple buyers under multi‐shipment consignment stock policy which is applied by the supplier when he delivers semi‐finished products to the vendor. The vendor who produces fully finished products applies the same policy when he delivers to buyers. The integrated system cost which consists of production cost, shipment cost and stock‐holding cost is minimized subject to no‐shortage in any part of the chain. Optimal decisions are obtained for a numerical example. It is found that the consignment stock policy performs better than the usual shipment policy when the stocking component of holding cost of the item is less in the downstream. The effectiveness of the consignment stock policy under different situations is also investigated.