Setting operation policies for supply hubs

Abstract

This paper deals with the joint optimisation of operations at the supply hub for the hub vendor and the upstream supplier. Different operating conditions are considered, namely, backordering, minimum and maximum specified inventory levels. Some analytical insights on better managing suppliers operating under a vendor managed inventory program are presented. Essentially, we show that the penalty cost imposed on over-and under stocking, and the min-max policy for hub inventory reside in the power of the hub operator while the order cost of dispatching and production reside with the supplier. A numerical example and an algorithm are included to highlight this result.