Inventory Policies and Information Sharing: An Efficient Frontier Approach

Abstract

We consider a two-tier inventory management system with one retailer and one supplier. The retailer serves a demand driven by a stationary moving average process (of possibly infinite order) and places periodic inventory replenishment orders to the supplier. In this setting, we study the value of information sharing and its impact on the retailer’s optimal ordering strategy. We argue that information sharing affects performance through two key cost drivers: (i) on-hand inventory variability and (ii) replenishment order variability. We characterize a “Pareto frontier” between these two sources of variability by identifying optimal inventory replenishment strategies that trade-off one type of variability for the other in a cost efficient way. For the case in which the retailer is able to share her complete demand history, we provide a full characterization of the efficient frontier, as well as of an optimal replenishment policy. On the other hand, when the retailer is not able (or willing) to share any demand information we provide a partial characterization of an optimal solution and show that information sharing does not always add value. We also show that the question of identifying conditions under which information sharing does offer value reduces to a delicate analysis of the invertibility (in a time series sense) of a specific stationary process.