Int. J.

Production Economics 135 (2012) 412419

Contents lists available at SciVerse ScienceDirect

Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

A serial supply chain of newsvendor problem with safety stocks under

complete and partial information sharing
In-Jae Jeong a,b,n, V. Jorge Leon c,d,1
a

Department of Technology Management, Hanyang University, 17 Haengdang-dong, Seongdong-gu, Seoul 133-791, Republic of Korea
Department of Industrial Engineering, Hanyang University, 17 Haengdang-dong, Seongdong-gu, Seoul 133-791, Republic of Korea
c
Department of Industrial and Systems Engineering, Texas A&M University, College Station, TX 77843-3131, USA
d
Department of Engineering Technology and Industrial Distribution, Texas A&M University, College Station, TX 77843-3367, USA
b

a r t i c l e i n f o

a b s t r a c t

Article history:
Received 1 February 2011
Accepted 8 August 2011
Available online 26 August 2011

We consider a supply chain where multiple members are serially connected. The decision is to determine
the ordering quantity of a member to the next upstream member in the supply chain. The basic cost
model is similar to the newsvendor problem with additional consideration to safety stock. This paper
presents optimal approaches for coordination of the supply chain under both complete and partial
information sharing in order to maximize the total expected benet. For complete information sharing
we develop an optimal coordination algorithm. For partial information sharing, we propose an optimal
coordination algorithm based on the Alternating Direction Method and the Diagonal Quadratic
Approximation Method. A numerical example is discussed to show the optimal convergence of ordering
quantities and discuss the properties of the proposed algorithms.
& 2011 Elsevier B.V. All rights reserved.

Keywords:
Supply chain
Augmented Lagrangian function
Newsvendor problem

1. Introduction
A supply chain is said to be coordinated if the entire benet of
the supply chain (SC) is maximized (Arshinder and Deshmukh,
2008). Based on the degree of decision autonomy and information
sharing among the members, SCs can be classied into unicentric
and polycentric supply chains. In a unicentric supply chain
(Stadtler and Kilger, 2005), there exists a focal company, which
has the power to request all required information (i.e., complete
information) from the members. In turn, the focal company
unilaterally makes decisions for supply chain coordination (SCC)
that all members accept without objection. The unicentric supply
chain can be found where the market is monopolized or dominated by a member in supply chain. In a polycentric supply chain
the decision authority is distributed among the members and
often there can be restrictions on how the information is shared
among the members (i.e., partial information sharing). In this case,
SCC cannot be achieved by a single member in the supply chain.
Instead all members need to participate in the decision making
process.

n
Corresponding author at: Department of Technology Management, Hanyang
University, 17 Haengdang-dong, Seongdong-gu, Seoul 133-791, Republic of Korea.
Tel.: 82 2 2220 0412; fax: 82 2 2296 0471.
E-mail addresses: ijeong@hanyang.ac.kr (I.-J. Jeong),
LEON@entc.tamu.edu (V. Jorge Leon).
1
Tel.: 1 979 845 4993.

0925-5273/$ - see front matter & 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2011.08.015

Most of the work in the literature seems to suggest that SCC is

easier to attain in a unicentric supply chains. At the same time, it is
widely accepted that global supply chain optimization remains one
of the main challenges in supply chain management due to network
complexity, members with conicting objectives, system dynamics,
system variations over time and information uncertainty management (Simchi-Levi et al., 2003). Interestingly, many of these reasons
would be attenuated in a polycentric supply chain since they will
rely less on all members having to transmit information to a
centralized location, would allow each member to autonomously
negotiate based on its local objectives; and would be more robust to
time and system variations since there is no dependence on a
monolithic formulation. From this perspective, it would be ideal to
allow a SC to operate as a polycentric SC as long as it can warranty
the same performance as a unicentric SC. The models presented in
this paper suggest that at least in some simple network congurations and cost model, global SCC can be achieved in both unicentric
and polycentric supply chain system environments.
In this paper, we present the global optimal solution under
complete information sharing among members. Also we propose
the ADM (Alternating Direction Method) and DQAM (Diagonal
Quadratic Approximation Method) based SCC method under the
partial information sharing environment. The ADM is a general
methodology to solve a convex programming using the augmented Lagrangian function (Bertsekas and Tsitsiklis, 1989; see Lee
and Jeong, 2010 for details). The ADM guarantees the convergence
to the global optimal solution theoretically. The proposed method
also guarantees the convergence to the global optimal solution.

I.-J. Jeong, V. Jorge Leon / Int. J. Production Economics 135 (2012) 412419

In addition, the local information of the safety stock policy of the

manufacturer is not disclosed to others and local parameters are
kept in private. It is important to note that the objectives of
optimization under complete information in a unicentric SC and
partial information sharing environment in a polycentric SC are
the same, the maximization of the expected benet of the
entire SC.
The ADM can only be applied to a convex programming where
we have two parties of decision makers. One partys decision
making must be made on other partys decision. We will show in
the later part of the paper that ADM can be applied to a serial
supply chain when we separate members into odd numbered
members and even numbered members. In addition, we propose
another algorithm with different interaction type among members, which is simultaneous and independent to other members
without classifying members into parties which is the DQAM
(Ruszczynski, 1995; see Lee and Jeong, 2010 for details) based
algorithm. The DQAM utilizes a reference solution in order to
separate the augmented Lagrangian function into the independent problems of members. The DQAM based algorithm also
guarantees the optimal convergence. The proposed algorithms
guarantee optimal convergences if and only if members accept
the proposed coordination mechanism, which is an important
assumption. Also algorithms take innite number of iterations to
converge in worst case.
This paper is organized as follows: Relevant literature survey is
shown in Section 2. Section 3 describes the model development.
Section 4 presents the problem description of the n-serial supply
chain considered in this paper and the global optimal solution
under compete information. Section 5 introduces the n-serial
supply chain model under partial information sharing environment
and optimal solution approaches. The solution approaches based
on ADM and DQAM are shown in Section 6. The numerical analysis
for 4-serial supply chain problem is shown in Section 7. Section 8
concludes the paper with possible extension in the future.

2. Literature review
There are many tactics to achieve SCC under complete information sharing such as the return contracts, the revenue sharing
contracts, risk sharing contracts, quantity exibility contracts and
capacity allocation. In return contracts, the retailer can return the
unsold inventory fully (i.e., full return contract) or to some xed
amount (i.e., partial return contract) at agreed upon prices
(Pasternack, 1985; Emmons and Gilbert, 1998; Marvel and Peck,
1995; Kandel, 1996; Padmanabhan and Png, 1997; Lariviere,
1999). These works have been extended to consider the attitude
of decision makers to the risk (Webster and Weng, 2000; Lee and
Lim, 2005). In the revenue sharing contracts, the manufacturer
offers the retailer a low wholesale price, lower than the unit
marginal cost. The retailer shares the fraction of his revenue with
the supplier (Giannoccaro and Pontrandolfo, 2004; Gan et al.,
2005). In quantity exibility contracts, the retailer can change the
ordered quantity after observing the actual customer demands
(Tsay, 1999; Tsay and Lovejoy, 1999). The capacity allocation is
another way to coordinate the manufacturer and retailers when
retailers order more than the available capacity of the manufacturer (Chachon and Lariviere, 1999, 2001).
The partial information sharing in SCC is a challenging issue
but a little effort has been reported in the literature. Karabati and
Sayin (2008) considered the information sharing issues among a
single supplier and multiple buyers where the supplier offers
quantity discounts. The considering problem was the Stackelberg
type model. Chu and Leon (2008) proposed a distributed SCC
procedure for single warehouse multiple retailers problem under

413

power-of-two policy where the warehouse and the retailers

communicate with minimal private information. Lee and Jeong
(2010) considered the same problem as Chu and Leon (2008) and
proposed a distributed SCC method which possesses a heterarchical communication structure among the warehouse and the
retailers. The model considered in Chu and Leon (2008) and Lee
and Jeong (2010) was Roundys model (1985).
The above mentioned researches focus on a simple twoechelon supply chain which is a supplierretailer or a warehouse
retailer structure. In this research, we study a serial supply chain,
which can be found in distribution channels where goods ow
from the upstream to the downstream of the supply chain and the
ordering information ow in the opposite direction.
Chu and Leon (2009) studied the dynamic lot sizing model of a
convergent supply chain under private information environment.
However, the model considered in this paper is the Newsvendortype problem where the customer demand is probabilistic.

3. Model development
Consider a supply chain of a manufacturer and a retailer (i.e.,
MR problem) with a Newsvendor-type problem. Let Y be the
customer demand with f(y) and F(y), the probability density
function (PDF) and cumulative density function (CDF) of demand,
respectively. The retailer sells items with the retail price, p per
unit and orders Q quantity to the manufacturer with the wholesale
price, c per unit. The manufacturer produces items with m unit
cost. Without loss of generality, we assume that m o c and c op.
For the problem setting of the traditional Newsvendor problem,
the expected prot of the retailer is
Z Q
GR Q pcQ p
Fydy
0

where R represents retailer. The expected prot of the manufacture is GM cmQ .

The expected system prot for the entire supply chain is as
follows:
Z Q
Z Q
GQ pcQ p
Fydy cmQ pmQ p
Fydy:
0

Then the optimal ordering quantity of the retailer to the

manufacturer is F 1 pm=p in order to maximize the expected
benet of the retailer and the manufacturer.
In order to determine the optimal order quantity, the selling price
to customer and the manufacturing cost that are private information
of the retailer and the manufacturer, respectively, must be known to
a unique decision maker. In addition, the CDF of demand which is
private information of the retailer must be known to the decision
maker. This is called an optimization under complete information in
a unicentric SC. This optimal decision may not possible in a
polycentric SC where only partial information sharing is available
among members. This is an optimization under partial information
sharing in a polycentric SC. This paper presents optimal solution
approaches for problems under complete information and partial
information sharing.

4. Optimization under complete information

We have a serial supply chain where n Z3 members are serially
connected from the upstream to the downstream of the supply
chain as shown in Fig. 1. The member i orders quantity Qi to the
member i1 in the upstream with unit purchasing price pi 1.
The downmost member has information of ultimate customer
demand, which is probabilistic.

414

I.-J. Jeong, V. Jorge Leon / Int. J. Production Economics 135 (2012) 412419

Qi

n
Pn+1

pi+1

Qi-1

Q2

pi

p3

Q1

Y, f(y),F(y)

p2

p1

Fig. 1. A general n-serial supply chain problem.

The expected benets of members are as follows:

8
R Qi
>
i1
>
< pi pi 1 Qi pi 0 RFydy,
Gi pi Qi1 pi 1 Qi pi 0Qi Qi1 Fydy, i 2,. . .,n1 :
>
>
: p p Q ,
in
i

i1

Note that local information of members such as purchasing

prices, demand distribution and safety stock policies must be
known to a single decision maker.
1

i1

5. Optimization under partial information sharing

The decision making problem of the serial supply chain under

complete information can be dened as follows:
Z Q1
n
X
max G
Gi p1 Q1 pn 1 Qn1 p1
Fydy
0

i1

n1
X
i2

st:

Qi Z1 ai Qi1 ,

pi

Qi Qi1

Fydy

i 2,. . .,n1

The objective function is the maximization of the expected

system benet. The constraint represents the safety stock policy
of intermediate members. ai Z0 is a real value, i 2,. . .,n1.
For the member 1, there is no reason to maintain safety stocks
without selling them to customers. For the last member n, we
assume that there exists innite number of inventory such that
we do not have shortages in the considering problem. For the
intermediate members i 2,. . .,n1, they may serve as members
for other supply chains. In order to reduce the variability of the
ordering from different supply chain, they may maintain safety
stocks. Note that the safety stock constraint also includes zerosafety stock policy if ai 0. Also the safety stock policy is private
information of the member which may not be disclosed to other
decision makers in the supply chain.
4.1. Global optimal solution
Theorem 1. The global optimal solution under complete information
environment can be found by the following equations:
n
1
Y
@G
p1 pn 1
1 ak p1 FQ1n p2 a2 Fa2 Q1n
@Q1
k2
(
!)
n1
i1
i1
X
Y
Y
pi ai
1 ak F ai
1 ak Q1n
0

i3

k2

In this section, we propose an optimal solution approach for

SCC of the supply chain under partial information sharing environment. In this case the safety stock level determined by a given
ai is only known by member i; furthermore, the prices are only
shared between adjacent members. Because of these information
restrictions the problem can no longer be solved as in the
previous section. We refer to this case as the partial information
sharing case. Let Qi,j be the ordering quantity proposed by the
member j for Qi where j i1 or i, i 1,2, . . .,n1. The equivalent
representation of the problem (3) is as follows:
Z Qi,i Qi 1,i
n1
X
maxpn pn 1 Qn1,n 
pi Qi1,i pi 1 Qi,i pi
Fydy
i2
Z Q1,1

p1 p2 Q1,1 p1

Fydy

st:

Qi,i 1 Qi,i ,

i 1,. . .,n1

Qi,i Z 1 ai Qi1,i ,

i 2,. . .,n1:

The objective function can be divided into independent members problems. However the constraints cannot be separated by
members due to the coupling constraint (7). The constraint (7)
implies that two adjacent members must agree on the same order
quantity. The constraint (8) is a local constraint of safety stocks
for member i.
To solve the problem (6)(8), it is decomposed into subproblems requiring only the information available to the corresponding decision maker. We introduce the Lagrangian multiplier ui
associated to the ith constraint of constraint (7). The augmented
Lagrangian function can be constructed as follows:
Z Qi,i Qi 1,i
n1
X
L pn pn 1 Qn1,n 
pi Qi1,i pi 1 Qi,i pi
Fydy
Z

k2

i2
Q1,1

Fydy

p1 p2 Q1,1 p1

n
,
Qin 1 ai Qi1

i 2,. . .,n1:


Proof. Consider the rst derivate of G on Qi in Eq. (2) as follows:

@G
pi FQi Qi1 pi 1 FQi 1 Qi o 0,
@Qi
@G
pn 1 pn1 FQn1 Qn2 o0,
@Qi

i 2,. . .,n2
i n1

n1
X

ui Qi,i 1 Qi,i 

i1

n1
X

1
Q
Qi,i 2
2 i,i 1
i1

Let Qi,i 1 t, Qi1,i1 t and ui t be the optimal solutions given

from member i1, i 1 and the current settings of the Lagrangian
multipliers at iteration t, respectively.
5.1. Downmost member problem

Since the rst derivative is negative, Qi 1 ai Qi1 ,

n1 or equivalently
n

Qin

i
Y

1 ak Q1n ,

i 2,. . .,n1:

i 2,. . .,

k2

The decision making problem of the downmost member 1 in

supply chain is as follows:

 

max LQ1,1 t 19 Q1,2 t,p2 ,f g, Fy
Z Q1,1 t 1
Fydy u1 tQ1,1 t 1
p1 p2 Q1,1 t 1p1
0

By replacing Qi of G with Eq. (5) and taking the rst derivative

on Q1 , Eq. (3) can be derived. &

1
Q1,2 tQ1,1 t 12 :
2

10

I.-J. Jeong, V. Jorge Leon / Int. J. Production Economics 135 (2012) 412419

As shown in the augmented Lagrangian function in Eq. (10),

data given to solve the problem at iteration t 1 consists of three
elements: (i) information that must be received from the
upstream member to member 1, (ii) information that must be
received from the downstream member to member 1 and (iii)
global information that must be known to all members. Eq. (10),
implies that Q1,2 t must be received from member 2 and p2 must
be shared with the member 2. Since the member 1 does not have
its downstream member, the second element is null set. Finally
the CDF is the information that must be known to all members in
the SC. It will be shown in Section 6 that the Lagrangian multipliers can be calculated locally. The optimal Q1,1 t 1 can be
calculated as follows:
@L
p1 p2 p1 FQ1,1 t 1 u1 t
@Q1,1 t 1
Q1,2 tQ1,1 t 1 0:

11

The above solution is global optimal since

@2 L
2 t 1
@Q1,1

415

Theorem 2. The solution Qi1,i t 1 and Qi,i t 1 satisfying Eqs. (16)

and (17) are global optimal.
Proof.


@2 L
@2 L


 @Qi,i2 t 1 @Qi,i t 1Qi1,i t 1 


H

@2 L
@2 L


2
 @Qi1,i t 1Qi,i t 1 @Qi1,i1 t 1 


 pi f Qi,i t 1Qi1,i t 11
pi f Qi,i t 1Qi1,i t 1 



pi f Qi,i t 1Qi1,i t 11 
 pi f Qi,i t 1Qi1,i t 1
18
The rst minor determinant of the Hessian matrix is pi f Qi,i
t 1Qi1,i t 11 o 0 and the second minor determinant is
2pi f Qi,i t 1Qi1,i t 1 1 40. Thus it is global optimal. &
If the safety stock constraint is not satised by Eqs. (16) and (17),
Qi1,i t 1 and Qi,i t 1 are determined by the following theorem:
Theorem 3. The solution Qi1,i t 1 and Qi,i t 1 satisfying
Eqs. (16) and (17) that does not satisfy Qi,i t 1 Z 1 ai Qi1,i
n
n
t 1, the optimal solution Qi1,i
t 1 and Qi,i
t 1 must satisfy
the following equations:

p1 f Q1,1 t 11 o 0:

5.2. Uppermost member problem

pi ui1 t Qi1,i1 t 1 ai Qi,i 1 tpi 1 ui t

The decision making problem of the uppermost member n in

the supply chain is


max LQn1,n t 19f g, Qn1,n1 t,un1 t,pn ,f g pn pn 1
1
Qn1,n t 1un1 tQn1,n t 1 Qn1,n t 1Qn1,n1 t2 :
2
12
Once Qn1,n1 t is given from the member n 1 and pn are
shared with the optimal solution can be found as follows:
@L
pn pn 1 un1 tQn1,n t 1Qn1,n1 t 0
@Qn1,n t 1
13

n
n
t 1pi ai Fai Qi1,i
t 1 0
1 1 ai 2 Qi1,i

19

n
n
t 1 1 ai Qi1,i
t 1
Qi,i

Proof. If the solution satisfying Eqs. (14) and (15) does not satisfy
Qi,i t 1 Z1 ai Qi1,i t 1, the optimal solution exists along
Qi,i t 1 1 ai Qi1,i t 1.
Let
Q Qi1,i t 1
and
Qi,i t 1 1 ai Q then the objective function is
Z ai Q
Fydy
max LQ pi Q pi 1 1 ai Q pi
0

ui1 tQ ui t1 ai Q
1
1
 Q Qi1,i1 t2  Qi,i 1 t1 ai Q 2 :
2
2

20

2
Also the above solution is global optimal since @ L=@Qn1,n
t 1 1o 0.

The rst derivative of L(Q) on Q gives the result of Eq. (19) and
the equation gives the global optimal solution since
@2 L
1 1 ai 2 pi ai 2 f ai Q o 0:
@Q 2

5.3. Intermediate member problem

The decision making problem of the intermediate member i,
i 2,. . .,n1 in the supply chain is as follows:




max LQi1,i t 1,Qi,i t 19 Qi1,i1 t,pi , Qi,i 1 t,pi 1 , Fy
pi Qi1,i t 1pi 1 Qi,i t 1
Z Qi,i t 1Qi1,i t 1
Fydyui1 tQi1,i t 1 ui tQi,i t 1
pi

&

In the following section, we propose two optimal algorithms

under partial information sharing, which converge to the global
optimal solution. The algorithms iteratively solve the above
mentioned members problems and communicate the optimal
solutions to the adjacent members in the supply chain.

1
1
 Qi1,i t 1Qi1,i1 t2  Qi,i 1 tQi,i t 12
2
2

st:

Qi,i t 1 Z1 ai Qi1,i t 1:

14
15

Once the constraint Qi,i t 1 Z1 ai Qi1,i t 1 is satised,

the optimal solution can be found as follows:
@L
pi 1 pi FQi,i t 1Qi1,i t 1
@Qi,i t 1
ui Qi,i 1 tQi,i t 1 0

16

@L
pi pi FQi,i t 1Qi1,i t 1
@Qi1,i t 1
ui1 tQi1,i t 1Qi1,i1 t 0

6. Optimal algorithms under partial information sharing

First, we propose ADM based algorithm. For n 3 example, we
have the downmost member 1, uppermost member 3 and one
intermediate member 2 in the supply chain. Assume that we start
with an arbitrary solution of member 2 at iteration 0 as Q1,2 0
and Q2,2 0. Then the optimal solution of the downmost and the
uppermost member at iteration 1, Q2,1 1 and Q2,3 1 can be
calculated from the Eqs. (11) and (13). Then the intermediate
member 2 can nd its own optimal solution, Q1,2 1 and Q2,2 1 at
iteration 1 using Eqs. (16) and (17) and Theorem 1. If the solutions
are not feasible (i.e., violate the coupling constraints), the Lagrangian multipliers updated as follows:
u1 1 u1 0 Q1,2 1Q1,1 1

17

u2 1 u2 0 Q2,3 1Q2,2 1

416

I.-J. Jeong, V. Jorge Leon / Int. J. Production Economics 135 (2012) 412419

where u1 0 and u2 0 are the arbitrary determined initial Lagrangian

multipliers. The iteration among one party of member 1 and 3 and
another party of member 2 continues until the solution converges to
a solution, which is the global optimal. This approach is called ADM
and it guarantees the global optimal convergence theoretically. This
concept can be extended to more general cases. Let one party be odd


numbered members, f1,3,. . .,  n1=2
2 1g and another be even

numbered members, f2,4,. . ., n=2 2g, where y bxc is the largest
integer such that yr x. Once solutions of odd numbered members are
given, the solutions of even numbered members can be determined
by Eqs. (16) and (17) and vice versa.
The ADM based optimal algorithm is summarized as follows:

given, each member can solve the individual problem using

Eqs. (11), (13), (16) and (17) and Theorem 3 independently. The
resulting solution is an updated reference point and the procedure continues until the reference point converges to a solution. If
the converged solution is feasible (i.e., the converged solution
satises the coupling constraint), the solution is the global
optimal. Otherwise, we update the Lagrangian multipliers and
the updating the reference point continues. This procedure is
called DQAM, which guarantees the global optimal convergence
theoretically. The proposed DQAM based algorithm is as follows:
6.2. DQAM based algorithm for the odd and even number of member
problem

6.1. ADM based algorithm for the odd number of member problem
Step 0. Set t 0.
Arbitrary determine ui t, i 1,2, :::,n1.
Arbitrary determine the solutions of odd numbered
members
Q2,1 t, Qn1,n t, Qi 1,i t and Qi1,i t.
Step 1. Obtain new solutions for even numbered members,
Qi 1,i t 1 and
Qi1,i t 1using Eqs. (11), (13), (16) and (17) and Theorem 3.
Step 2. Obtain new solutions for odd numbered members,
Qi 1,i t 1 and
Qi1,i t 1using Eqs. (11), (13), (16) and (17) and Theorem 3.
Step 3. If Qi,i 1 t 1 Qi,i t 1, i 1,2,. . .,n1 then stop.
Otherwise set ui t 1 ui t Qi,i 1 t 1Qi,i t 1,
i 1,2,. . .,n1
and increase t by 1 and go to Step 1.
The information ows of ADM is shown in Fig. 2.
For example, when n5, the decision for each members can be
separated when the decision of members are grouped {1,3,5} and
{2,4}. Once the order quantities for {1,3,5} are given to {2,4},
members of {2,4} can make decision on their own order quantities
independently. In general, if we group odd numbered members as
one group, even numbered members as another group, the
problem can be separated as independent member problems.
In terms of information sharing, note that stock inventory rates
are kept locally and the selling price are shared between the
adjacent members. Also the demand information (i.e., CDF of
customer demand) must be shared among all the members in the
supply chain in order to determine optimal ordering quantities.
Sharing the information of customer demand is a well known
strategy to alleviate the so called Bullwhip Effect in a supply
chain. The Bullwhip effect is the phenomenon that the amplication of order quantity and inventory level increases from the
downstream to the upstream of a supply chain.
The DQAM based algorithm starts with an arbitrary solution of
all members in the problem. Since all the adjacent solutions are

Step 0. Initialization: Set e, L, t 0 and l 1.

Arbitrarily determine Qi,i t, Qi,i 1 ti 1,2,. . .,n1 and ui t.
Set Q^ i,i l Qi,i t and Q^ i,i 1 l Qi,i 1 t

i 1,2,. . .,n1:

Step 1. For i 1,2,. . .,n, obtain a new solution Q1,1 l 1,

Qi,i l 1, Qi1,i l 1
and Qn1,n l 1 using Eqs. (11), (13), (16) and (17) and
Theorem 3.
Step
2.
If
9Qi,i 1 l 1Qi,i l 1Qi,i 1 lQi,i l9 r e,
i 1,2,. . .,n1
or l L then go to Step 3. Otherwise set
Q^ i,i l 1 Q^ i,i l Qi,i l 1Q^ i,i l,
for
Q^ i,i 1 l 1 Q^ i,i 1 l Qi,i 1 l 1Q^ i,i 1 l,
i 1,2, :::,n1 and
increase l by 1 and go to Step 1.
Step 3. If Qi,i 1 l 1 Qi,i l 1, i 1,2,. . .,n1 then stop.
Otherwise set ui t 1 ui t rQi,i 1 l 1Qi,i l 1
and increase t by 1 and go to Step 1.
Step 0 initializes the corresponding parameters and set an
arbitrarily solution as a reference solution. In Steps 1 and 2, the
initial reference point is consecutively updated until it converges
to a solution. Step 3 checks whether the converged solution
satises the coupling constraints. If not all the coupling constraints are satised, the Lagrangian multipliers are updated and
the procedure is repeated. L implies the number of iteration of
updating the reference point and t represents the number of
iteration of updating the Lagrangian multipliers.
It is important to note here both the ADM and DQAM based
algorithm guarantee the optimal convergence. Two algorithms
are different in terms of the frequency of updating the Lagrangian
multipliers. ADM based algorithms update the Lagrangian multipliers for each iteration; however, in DQAM based algorithms, the

Fig. 2. Information ows for ADM.

I.-J. Jeong, V. Jorge Leon / Int. J. Production Economics 135 (2012) 412419

417

Fig. 3. Information ows of DQAM for a general n-serial supply chain problem.

120
100
80
Q

Lagrangian multipliers are updated if and only if the reference

point converges to a certain solution. The different behavior of
algorithms will be explained by numerical analysis in Section 7.
The information ow for the proposed DQAM based algorithm
is shown in Fig. 3. Note that members share selling price only
with their neighborhood. Also note that the demand information
must be shared among all the members in order to calculate
optimal ordering quantities.

60

7. Numerical example

40

In this section, we examine the example of n 4 serial supply

chain problem. We apply both the ADM and DQAM based
algorithms and compare the behavior of the optimal convergence
of the algorithms.
Example, consider a SupplierManufacturerCenterRetailer
problem (SMCR problem), which is n4 serial supply chain
problem. Parameter settings are as follows: p1 $100, p2 $75,
p3 $50, p4 $25, p5 $1, f(y)U(0,100), a2 0:1 and a3 0:1.
Considering Eq. (5), the global optimal solution of the retailer
can be calculated as follows:

20

Q1n

p1 p5 1 a2 1 a3

p1 =100 p2 a22 =100 p3 a23 1 a2 2 =100

n
Q2 1 a2 Q1n 107:22,

Center
0

11 13 15 17 19 21 23 25 27 29
i

Fig. 4. Ordering quantities of the retailer and the center of ADM for example.

120

97:47,

100
80
Q

Q3n 1 a3 Q2n 117:94

In order to apply algorithms, we set the initial solution as follows:
Q1,1 0100, Q1,2 010, Q2,2 050, Q2,3 0100, Q3,3 070,
Q3,4 0 30, u1 0 20, u2 0 20, u3 0 20. For DQAM, we set
e 0:001 and L1000.
Figs. 46 are the results of ADM based algorithm for the
example. Fig. 4 shows the behavior of order quantities between
the center and the retailer. Even though the center and the
retailer start the iteration with 100 and 10, respectively, they
converge to the global optimal quantity, 97.47. Similarly Fig. 5
shows the order quantities between the manufacture and the
retailer and the result also shows that their order quantities
converge to the global optimal quantity, 107.22. The manufacturer and the supplier also agreed on the global optimal ordering
quantity, 117.94 as shown in Fig. 6.
Figs. 79 show the behavior of ordering quantities between
the retailer and center, center and manufacturer, manufacturer
and supplier respectively when we apply DQAM for the example
problem. Fig. 6 shows the behavior of ordering quantity, Q1 from
the retailer to the center proposed by the retailer, Q1,1 and the
center Q1,2 for the example problem. The gure shows that the
initial reference point converged to a solution about l105th
iteration. However the converged solution is not feasible because
two ordering quantities are not the same. Thus at t 2, the
Lagrangian multiplier is updated and the new reference point

Retailer

60
40
Center

20

Manufacturer
0

11 13 15 17 19 21 23 25 27 29
i

Fig. 5. Ordering quantities of the center and the manufacturer of ADM for
example.

converged to the global optimal solution, 97.47 about 200th

iteration.
Same reasoning can be applied to Figs. 8 and 9.
It seems that the compromise gap (i.e., the difference between
ordering quantities) between two members in the downstream of
the supply chain is larger than that in the upperstream. However
the optimality gap (i.e., the deviation from the optimal ordering
quantity) in the downstream is smaller than that in the

418

I.-J. Jeong, V. Jorge Leon / Int. J. Production Economics 135 (2012) 412419

140

250

120

200

100

Manufacturer
Supplier

150

80
Q

100

60
50

40
Manufacturer

20
0

Supplier
1

11 13 15 17 19 21 23 25 27 29

1 15 29 43 57 71 85 99 113 127 141 155 169 183 197 211 225 239
l

Fig. 9. Ordering quantities of the manufacturer and the supplier of DQAM for example.

i
Fig. 6. Ordering quantities of the manufacturer and the supplier of ADM for
example.

Compared to ADM, DQAM requires more iterations to converge and lesser updates of the Lagrangian multipliers. However
the interaction method among members of ADM is more complicated than DQAM. In ADM, members must be partitioned into two
groups and interactions are performed group by group iteratively.
Meanwhile, in DQAM, members interact with adjacent members
simultaneously and independently.
In terms of information sharing, ADM and DQAM methods are
similar. In ADM and DQAM, only the selling price is shared
between two adjacent members the ordering quantities are communicating. However, members in DQAM must maintain and
update the reference point locally during the solution procedure.

8. Conclusion

Fig. 7. Ordering quantities of the retailer and the center of DQAM for example.

250
Center
Manufacturer

200

150

100

50

1 15 29 43 57 71 85 99 113 127 141 155 169 183 197 211 225 239
l

This paper presents optimal approaches for the coordination of

a serial supply chain in order to maximize the total expected
benet under complete and partial information sharing environments. We provided an optimal solution for the optimization
under complete information. For supply chain coordination under
partial information sharing, we proposed ADM and DQAM based
algorithms. ADM and DQAM are the iterative interaction methods, which guarantee the optimal convergence of the solutions
proposed by individual decision makers for a special structure of
convex programming. The numerical analysis indicates that ADM
is better than DQAM in terms of convergence speed.
The proposed decision making procedure can be proceeded
automatically in a computerized system without the intervention
of human, if the single item considered in this paper is a B or C
class item in ABC inventory management system. Thus, even
though the proposed algorithms require many iterations, it will
take less than a second for computation. The research can be
extended to a more complex supply chain structure rather than a
serial supply chain such as a convergent or divergent supply
chain. Also we do not consider the delivery lead time in this
paper. However, in real world scenario, it may cause a stochastic
delivery lead time from a member to the adjacent member.

Fig. 8. Ordering quantities of the center and the manufacturer of DQAM for
example.

References
upperstream of the supply chain. We believe that this phenomenon is closely related to the Bullwhip effect. The maintaining of
the safety stock in downstream of the supply chain amplies the
ordering quantities placed to upstream, which causes the Bullwhip
effect.

Arshinder, A.K., Deshmukh, S.G., 2008. Supply chain coordination: perspectives,

empirical studies and research directions. International Journal of Production
Economies 114, 316335.
Bertsekas, Dimitri P., Tsitsiklis, John N., 1989. Parallel and Distributed Computation: Numerical Methods. Prentice Hall, pp. 253261.

I.-J. Jeong, V. Jorge Leon / Int. J. Production Economics 135 (2012) 412419

Chachon, G.P., Lariviere, M.A., 1999. Capacity choice and allocation: strategic
behavior and supply chain performance. Management Science 45 (8),
10911108.
Chachon, G.P., Lariviere, M.A., 2001. Contracting to assure supply: how to share
demand forecasts in a supply chain. Management Science 47 (5), 629646.
Chu, C., Leon, V., 2008. Power-of-two single-warehouse multi-buyer inventory
coordination with private information. International Journal of Production
Economics 111, 562574.
Chu, C., Leon, V., 2009. Scalable methodology for supply chain inventory coordination with private information. European Journal of Operational Research 195,
262279.
Emmons, H., Gilbert, S.M., 1998. Note. The role of returns policies in pricing and
inventory decisions for catalogue goods. Management Science 44, 276283.
Gan, X., Sethi, S.P., Yan, H., 2005. Channel coordination with a risk-neutral supplier
and a downside-risk-averse retailer. Production and Operations Management
14 (1), 8089.
Giannoccaro, I., Pontrandolfo, P., 2004. Supply chain coordination by revenue
sharing contract. International Journal of Production Economies 89, 131139.
Kandel, E., 1996. The right to return. Journal of Law and Economics 39, 329356.
Karabati, S., Sayin, S., 2008. Single-supplier/multiple-buyer supply chain coordination: incorporating buyers expectations under vertical information sharing.
European Journal of Operational Research 187, 746764.
Lariviere, M.A., 1999. Supply chain contracting and coordination with stochastic
demand. In: Tayur, S., Ganeshan, R., Magazine, M. (Eds.), Quantitative Models for
Supply Chain ManagementKluwer Academic Publishers, Boston, pp. 233268.
Lee, D.J., Jeong, I.J., 2010. A distributed coordination for a single warehousemultiple retailer problem under private information. International Journal of
Production Economics 125, 190199.

419

Lee, C.H., Lim, J.I., 2005. Designing a supply chain coordinating returns policies for
a risk sensitive manufacturer. International Journal of Management Science 11
(2), 117.
Marvel, H.P., Peck, J., 1995. Demand uncertainty and returns policies. Decision
Science 21, 710726.
Padmanabhan, V., Png, I.P.L., 1997. Manufactureres returns policies and retail
competition. Marketing Science 4, 166176.
Pasternack, B.A., 1985. Optimal pricing and return policies for perishable commodities. Marketing Science 4 (2), 166176.
Roundy, R., 1985. 98%-effective integer-ratio lot-sizing for one-warehouse multiretailer systems. Management Science 31, 14301460.
Ruszczynski, A., 1995. On convergence of an augmented lagrangian decomposition
method for sparse convex optimization. Mathematics of Operations Research
20, 634655.
Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., 2003. Designing and Managing the
Supply Chain: Concepts, Strategies and Case Studies, 2nd edition McGraw-Hill.
Stadtler, T., Kilger, C., 2005. Supply Chain Management and Advanced Planning:
Concepts, Models, Software and Case Studies, 3rd edition Springer, Berlin.
Tsay, A., 1999. The quantity exibility contract and suppliercustomer incentives.
Management Science 45 (10), 13391358.
Tsay, A.A., Lovejoy, W.S., 1999. Quantity exibility contracts and supply chain
performance. Manufacturing and Service Operations Management 1 (2),
89111.
Webster, S., Weng, Z.K., 2000. A risk-free perishable item return policy. Manufacturing and Service Operations Management 2 (1), 100106.