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

Authors:
Danqin Yang;Tsan-Ming Choi;Tiaojun Xiao;T. C. E. Cheng
Affiliations:
School of Management Science and Engineering, Nanjing University, Nanjing 210093, China;Business Division, Institute of Textiles and Clothing, Faculty of Applied Science and Textiles, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong;School of Management Science and Engineering, Nanjing University, Nanjing 210093, China;Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong and School of Management Science and Engineering, Nanjing University, Nanjing 21009 ...
Venue:
Automatica (Journal of IFAC)
Year:
2011

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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.