Optimal and heuristic policies for production and inventory controls in dual supply chains with fluctuating demands

Abstract

In the context of fast‐fashion business, we study the joint control of production, inventory, and unilateral transshipment in dual supply chains in which one supply chain is a responsive supply chain for fashion products and the other is an efficient supply chain for basic products in a fluctuating demand environment (FDE). Our research focuses on: (1) formulating an appropriate model for this complex problem; (2) characterizing the structured optimal policy, which can be used to develop effective heuristic policies; and (3) generalizing our studies for more applications. To address these issues, we formulate a discrete‐time finite‐horizon stochastic dynamic program model in which FDE is represented by a world state evolving in accordance with the discrete‐time Markov chain. The supply chain for the fashion product is modeled by a two‐stage tandem production system with a make‐to‐stock (MTS) stage for the fabric and a subsequent MTS stage for finished fashions. In parallel, the supply chain for the basic products is also modeled by a two‐stage tandem production system with a MTS stage for the fabric and a subsequent make‐to‐order (MTO) stage for finished basics. Further, the two supply chains are coupled via the unilateral transshipment of fabric with random transshipment time. By value iteration, we characterize the optimal policy for the single‐product problem with a set of monotone switching surfaces. The results are extended to the multi‐product multi‐supplier case. Further, based on the structure of the optimal policy, we develop a heuristic policy for the multi‐dimensional dynamic program model. From a practice perspective, we demonstrate the value of transshipment and controlled transshipment, analytically and numerically, and therefore justify the establishment of two separate local manufacturing bases in dual supply chains. Additionally, to achieve both quick response and efficiency, we show that the total cost can be reduced significantly if sufficient fabric is prepared just in time (JIT) for in‐season production at the beginning of a season.