Academic Events

Shi Chen

University of Washington

In recent years, information distortion and incentive misalignment have contributed to suboptimal supply chain performance. As a result, many companies have adopted the “control tower” approach, in which one party assumes responsibility for replenishment decisions across the supply chain. But who should direct the control tower? In some cases, this role is assigned to the customer – Customer-Managed Inventory (CMI) – and in others, to the supplier – Supplier-Managed Inventory (SMI). This paper investigates when it is preferable to adopt one approach over the other. We consider a two stage supply chain with either a one-to-one inventory structure (a customer with a single warehouse) or a one-to-many structure (a customer with multiple warehouses), and derive the optimal inventory policies and cost-sharing contract parameters under both CMI and SMI. Our analysis reveals that two primary factors drive the choice between CMI and SMI: the shortage penalty cost ratio between the customer and supplier, and the number of customer warehouses. A higher customer-to-supplier penalty cost ratio or fewer customer warehouses tends to favor CMI, while the opposite conditions favor SMI. Secondary factors, including holding costs, lead times, the distribution of demand across warehouses, and demand correlation, also play a role. We illustrate our findings with four industry cases: Barilla, Saturn, Boeing, and HP. The results offer practical guidance for selecting and implementing the appropriate control tower strategy, enabling firms to improve supply chain performance through more effective allocation of decision rights and cost-sharing mechanisms.

Key words: Control tower approach, supply chain coordination, decision-rights transfer, cost-sharing mechanisms, customer-managed inventory, supplier-managed inventory