Approaches to Inventory Management in Supply Chains: a Comparative Study

In this study we present and compare four different approaches to inventory management in supply chains: the decomposition approach, where each company optimizes its own production and inventories without considering how this affects its partners’ situation; the integrated approach, which assumes complete trust between the partners who minimize the total production and logistic cost throughout the supply chain; the coordination approach, in which self-interested autonomous partners adopt some coordination mechanism to mutually benefit from the decrease of costs in the supply chain; and finally, the bilevel approach, where the partner who decides first predicts and takes into account the response that it can expect from its self-interested partners. Each of these approaches will be illustrated on a simple two-level single-item lot sizing problem.