Application of Game Theory on Inventory Level Decision Making
International Journal of Business and Economics Research
Volume 3, Issue 6, December 2014, Pages: 211-219
Received: Nov. 12, 2014; Accepted: Nov. 21, 2014; Published: Nov. 25, 2014
Views 2881      Downloads 254
Masoud Vaziri, Dept. of Industrial and Systems Engineering, University of Rhode Island, Kingston, USA
Manbir Sodhi, Dept. of Industrial and Systems Engineering, University of Rhode Island, Kingston, USA
Article Tools
Follow on us
Many companies producing durable products, profit more from spares than the base parts. In a competitive and uncertain aftermarket, an Original Equipment Manufacturer (OEM) can benefit from Game Theory to manage spare parts inventories. We study the spare parts inventory game as an N-person non-zero-sum single-shot game where players play simultaneously. The game is restricted to a two-player (the OEM and the market) non-cooperative game setup. The market is an unreasoning entity whose strategic choices affect the payoff of the OEM, with no interest in the outcome of the game. This is a game against nature, which means the OEM plays against the market. The OEM decides on a pricing strategy (in a competitive manner with low cost manufacturers or will-fitters to absorb more customers) and the order-up-to stock level, and its inventory level strategy is not dominated – i.e. the game has a mixed strategy solution. This solution maximizes the payoff for the OEM by setting the price and the inventory level based on assumptions on the lower and upper bounds of the demand’s distribution parameters.
Spare Parts Management, Spare Parts Pricing, Game against Nature, Stochastic Demand
To cite this article
Masoud Vaziri, Manbir Sodhi, Application of Game Theory on Inventory Level Decision Making, International Journal of Business and Economics Research. Vol. 3, No. 6, 2014, pp. 211-219. doi: 10.11648/j.ijber.20140306.12
P. Suomala, M. Sievänen, and J. Paranko, “The effects of customization on spare part business: a case study in the metal industry,” International Journal of Production Economics, vol. 79, no. 1, pp. 57–66, 2002.
S. Wagner and E. Lindemann, “A case study-based analysis of spare parts management in the engineering industry,” Production Planning and Control, vol. 19, no. 4, pp. 397–407, 2008.
M. A. Cohen, N. Agrawal, and V. Agrawal, “Winning in the aftermarket,” Harvard business review, vol. 84, no. 5, p. 129, 2006.
T. Gallagher, M. D. Mitchke, and M. C. Rogers, “Profiting from spare parts,” The McKinsey Quarterly, vol. 2, 2005.
M. A. Cohen and H. L. Lee, “Out of touch with customer needs? Spare parts and after sales service,” Sloan management review, vol. 31, no. 2, pp. 55–66, 1990.
M. A. Cohen, Y. S. Zheng, and V. Agrawal, “Service parts logistics: a benchmark analysis,” IIE transactions, vol. 29, no. 8, pp. 627–639, 1997.
J. A. Muckstadt, Analysis and algorithms for service parts supply chains. Springer, 2004.
S. Kumar, Parts Management Models and Applications: A Supply Chain System Integration Perspective. Springer, 2004.
L. Fortuin, “The all-time requirement of spare parts for service after sales—theoretical analysis and practical results,” International Journal of Operations \& Production Management, vol. 1, no. 1, pp. 59–70, 1980.
L. Fortuin and H. Martin, “Control of service parts,” International Journal of Operations \& Production Management, vol. 19, no. 9, pp. 950–971, 1999.
J. Von Neumann and O. Morgenstern, Theory of Games and Economic Behavior (Commemorative Edition). Princeton university press, 1953.
M. Dror and B. C. Hartman, “Survey of cooperative inventory games and extensions,” Journal of the Operational Research Society, vol. 62, no. 4, pp. 565–580, 2010.
G. P. Cachon and S. Netessine, “Game theory in supply chain analysis,” Tutorials in Operations Research: Models, Methods, and Applications for Innovative Decision Making, 2006.
A. Meca, J. Timmer, I. García-Jurado, and P. Borm, “Inventory games,” European Journal of Operational Research, vol. 156, no. 1, pp. 127–139, 2004.
S. Anily and M. Haviv, “The cost allocation problem for the first order interaction joint replenishment model,” Operations Research, vol. 55, no. 2, pp. 292–302, 2007.
Dror and Hartman, “Shipment consolidation: who pays for it and how much?,” Management Science, vol. 53, no. 1, pp. 78–87, 2007.
W. Heuvel and B. van den P, “H Hamers (2007). Economic lot-sizing games,” European Journal of Operational Research, vol. 176, pp. 1117–1130, 2007.
P. Mileff and K. Nehéz, “Applying Game Theory in Invenory Control Problems,” 2006.
J. A. Muckstadt, “A model for a multi-item, multi-echelon, multi-indenture inventory system,” Management science, vol. 20, no. 4-Part-I, pp. 472–481, 1973.
C. Larsen and A. Thorstenson, “A comparison between the order and the volume fill rate for a base-stock inventory control system under a compound renewal demand process,” Journal of the Operational Research Society, vol. 59, no. 6, pp. 798–804, 2008.
A. Chinchuluun, A. Karakitsiou, and A. Mavrommati, “Game theory models and their applications in inventory management and supply chain,” Pareto Optimality, Game Theory And Equilibria, pp. 833–865, 2008.
P. D. Straffin, Game theory and strategy, vol. 36. MAA, 1993.
M. Beckenkamp, “Playing strategically against nature? Decisions viewed from a game-theoretic frame,” 2008.
S. F. Love, Inventory control. McGraw-Hill New York, 1979.
S. C. Wheelwright and R. J. Hyndman, Forecasting: methods and applications. John Wiley \& Sons Inc, 1998.
J. Boylan, A. Syntetos, and G. Karakostas, “Classification for forecasting and stock control: a case study,” Journal of the Operational Research Society, vol. 59, no. 4, pp. 473–481, 2006.
K. Inderfurth and K. Mukherjee, “Decision support for spare parts acquisition in post product life cycle,” Central European Journal of Operations Research, vol. 16, no. 1, pp. 17–42, 2008.
C. C. Sherbrooke, Optimal inventory modeling of systems: multi-echelon techniques, vol. 72. Springer, 2004.
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
Tel: (001)347-983-5186