Impact of merging activities in a supply chain under the Guaranteed Service Model: Centralized and decentralized cases

Abstract In this paper, we study the performance of a serial multi-echelon supply chain managed according to the Guaranteed Service Model (GSM) when merging two related stages. We show that such a collaborative mechanism improves the supply chain’s performance. We derive several interesting properties under which the total holding cost decreases after the stages are merged. Furthermore, we investigate a decentralized system controlled by two supply chain players such that each one manages its inventory according to the GSM. We extend this system when these players decide to work together by merging the stages which connect their supply chains. We characterize the Nash and Stackelberg equilibria under the scenario in which each player decides to optimize only its own part in the supply chain. We then propose a simple contract between the two supply chain players based on the unit purchase price as a coordination mechanism.