Capacity coordination under uncertain yield for supply chains with a single supplier and two competing retailers

Abstract

The product’s yield rates of somewhat unpredictable due to their innovative and sophisticated manufacturing processes, and as a result, the demand for downstream supplier chain members may not always be satisfied. Therefore, contractual agreements are often established to facilitate order fulfilment between suppliers and retailers and thus sustain their cooperative partnerships. This study considers a supply chain, in which a single supplier cooperates with long-term and newly cooperating retailers and develops a game-theoretic model to investigate the optimal capacity allocation strategy for the supply chain. In considering the supplier’s uncertain capacity and competition from the other rival retailer, both retailers will tend to order more than they actually need to avoid possible shortage loss. However, this may strengthen the bullwhip effect and damage the effectiveness of the supply chain. A strategic capacity allocation mechanism with contractual agreements is adopted to prevent distortion of order quantities and also to ensure that the retailers can receive their minimal acceptable quantities. In addition, it is determined that revenue-sharing coordination will mitigate the bullwhip effect and enhance profits for the entire supply chain. The results indicate that the proposed approach will make it possible for the long-term cooperating retailer to honestly place orders.