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Allocation of Cost Savings in a Three-Level Supply Chain with Demand Information Sharing: A Cooperative-Game Approach

Department of Computing and Decision Sciences, Lingnan University, Tuen Mun, Hong Kong
DeGroote School of Business, McMaster University, Hamilton, Ontario, Canada L8S 4M4
mmleng{at}ln.edu.hk
parlar{at}mcmaster.ca

We analyze the problem of allocating cost savings from sharing demand information in a three-level supply chain with a manufacturer, a distributor, and a retailer. To find a unique allocation scheme, we use concepts from cooperative game theory. First, we analytically compute the expected cost incurred by the manufacturer and then use simulation to obtain expected costs for the distributor and the retailer. We construct a three-person cooperative game in characteristic-function form and derive necessary conditions for the stability of each of five possible coalitions. To divide the cost savings between two members, or among three supply chain members, we use various allocation schemes. We present numerical analyses to investigate the impacts of the demand autocorrelation coefficient, , and the unit holding and shortage costs on the allocation scheme.

Subject classifications: inventory/production; information sharing; games/group decisions; cooperative; supply chain management; cooperative game theory; Nash arbitration scheme; constrained core; Shapley value; constrained nucleolus solution; simulation.
History: Received September 2005; revision received November 2007; accepted January 2008.