Distribution channel coordination through penalty schemes

Authors:
Quansheng Lei;Jian Chen
Affiliations:
School of Automation, Beijing University of Posts and Telecommunications, Beijing, China;School of Economics and Management, Tsinghua University, Beijing, China
Venue:
ICMLC'05 Proceedings of the 4th international conference on Advances in Machine Learning and Cybernetics
Year:
2005

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Abstract

This paper studies a stochastic inventory problem from the viewpoint of minimizing distribution system costs. First, the order quantity of every period must be greater than some minimal level and less than some upper limit, and we apply penalties to the retailer when his/her purchase quantity exceeds these specified boundaries. Then the dynamic programming equation for the problem is established, and we prove the existence of an optimal policy and characterize the dynamic programming equation both in finite and infinite horizons. Finally, an example is provided, and computational results indicate that penalty schemes can lead to significant savings in total expected distribution system costs.