COORDINATING A SUPPLY CHAIN WITH DEMAND INFORMATION UPDATING

Abstract

We investigate how to coordinate a two-echelon supply chain in which a supplier builds production capacity in advance and a manufacturermakes the ordering decision based on updated demand information. By combiningEuropean call option and buyback mechanisms, we propose a new hybridoption-buyback contract to coordinate such a supply chain with demandinformation updating. We construct a two-stage optimization model in thatthe supplier offers option price and the manufacturer decides initial orderingquantity in the first stage, then the supplier offers exercise price and buybackprice and the manufacturer decides final ordering quantity in the second stageafter demand information is updated. In both the centralized and decentralizedsettings, we analytically derive the optimal equilibrium solutions of two-stageordering quantity. Particularly, we obtain closed-form formulae to describe themembers' optimal behavior with a bivariate uniformly distribution. We provethat the proposed contracts can realize the perfect coordination of the supplychain and analyze how the proposed contracts affect the members' decisions.The theoretical results show that, by tuning the option price or buyback price,the supply chain profit can be arbitrarily split between the members, which isa desired property for supply chain coordination. Compared with the standardoption and buyback contract, the proposed contract results in a greater supplychain profit and achieves Pareto improvement for the supply chain members.Furthermore, extending the baseline model focusing on price-independent demandto the case of price-dependent demand, we show that the proposed contractstill can achieve supply chain coordination. Numerical examples are alsoconducted to complement the theoretical results