Coordinating a two-supplier and one-retailer supply chain with forecast updating

Danqin Yang, Tsan Ming Choi, Tiaojun Xiao, Edwin Tai Chiu Cheng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

53 Citations (Scopus)

Abstract

We consider the component-purchasing problem for a supply chain consisting of one retailer and two complementary suppliers with different lead-times. The retailer purchases a specific component from each supplier for assembling into a fashionable product. After ordering from the long-lead-time supplier (Supplier 1) and before ordering from the short-lead-time supplier (Supplier 2), the retailer can update its demand forecast for the product. The retailer can partially cancel its order from Supplier 1 after forecast updating. By formulating the problem as a dynamic optimization problem, we explore the measures that can be deployed to coordinate the retailer's ordering decisions with forecast updating. We analytically show that the supply chain can be coordinated if both suppliers offer a returns policy and Supplier 1 charges an order-cancelation penalty to the retailer. We find that the coordination mechanism is independent of demand distribution and the forecast updating process. We further show that it is easier for the suppliers to coordinate the supply chain if market observation indicates the future market demand is sufficiently large. We also study the case where demand is price-dependent and propose a generalized revenue-sharing contract to coordinate the supply chain. We discuss the academic and managerial implications of the theoretical findings.
Original languageEnglish
Pages (from-to)1317-1329
Number of pages13
JournalAutomatica
Volume47
Issue number7
DOIs
Publication statusPublished - 1 Jul 2011

Keywords

  • Forecast updating
  • Game theory
  • Markdown money
  • Returns policy
  • Supply chain coordination

ASJC Scopus subject areas

  • Control and Systems Engineering
  • Electrical and Electronic Engineering

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