Inter-temporal inventory competition and the effects of capacity constraints

This paper addresses an intertemporal inventory competition between a supplier (a provider, manufacturer) and a retailer engaged in a supply chain. The paper's focus is on the effect of capacity constraints on both parties when demands are seasonal. The paper provides a comparative study of two solution approaches, one is based on supply chain competition and the other is based on system wide optimization. Our results demonstrate that with dynamic inventory competition, the retailer reduces inventory costs by reducing the response period to higher demands while increasing the supply requests compared to the system-wide optimal approach. As a result, the supplier's inventory costs increase. An example illustrating these particular facets of the problem and its application is presented and discussed in light of the supplier and the retailer coordinating policies.