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Coordinating Lot Sizing Decisions Under Bilateral Information Asymmetry
Author(s) -
Zissis Dimitris,
Ioannou George,
Burnetas Apostolos
Publication year - 2020
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.13106
Subject(s) - flexibility (engineering) , information asymmetry , computer science , private information retrieval , sizing , core (optical fiber) , mechanism design , risk analysis (engineering) , operations research , operations management , business , process management , microeconomics , economics , computer security , art , telecommunications , management , engineering , visual arts
We consider inventory management decisions when manufacturing and warehousing are controlled by independent entities. The latter possess private information that affects their choices and are allowed to communicate via a mediator who attempts to streamline their decisions without restricting their freedom. The mediator designs a mechanism based on quantity discounts to minimize the overall system costs, attempting to reach a win–win situation for both entities. Using the Revelation Principle, we show that it is in the entities’ self‐interest to reveal their information and we prove that coordination is attainable even under bilateral information asymmetry. The acceptable cost allocation is not unique, providing adequate flexibility to the mediator during mechanism design; the flexibility may reflect the relative power of the entities and is quantified in our work by a series of computational experiments. Our approach is motivated by inventory management practices in a manufacturing group and, thus, it is directly applicable to real‐life cases.