Abstract
This paper investigates contracts adjustment between one manufacturer and one retailer under bilateral information updating. The manufacturer incurs uncertain production cost and the retailer faces uncertain demand, but they can acquire independent signals to update production cost and demand, respectively. They commit an initial agreement on an initial wholesale price, minimum order quantity, and information sharing as well as the transfer payment and decisions adjustment when information is updated. We find that due to the joint impact of production cost variation and market variation, the manufacturer may not decrease (increase) her wholesale price when the updated production cost is lower (higher) than expected. The retailer places an additional order even if the wholesale price rises when the market outlook is good, but places an order with the minimum order quantity even if the wholesale price falls when the market outlook is bad. Secondly, for a certain level of information accuracy of the production cost and market demand, the retailer is always better off with information updating, but the manufacturer may be worse off with information updating when facing a bad market outlook. Thirdly, when information accuracy of the production cost and market demand varies, the manufacturer only benefits from a high accuracy of production cost. Profits of the retailer and the supply chain are increasing (decreasing) with accuracy of production cost if the updated production cost is larger (smaller) than expected.
Highlights
Information largely affects the performance of supply chain firms. is is because better information contributes to better decisions, fewer mistakes, lower costs, and better products. erefore, supply chain firms prefer to make their decisions until information is updated
We show how the wholesale price varies in different conditions, which depends on bilateral information updating and how the retailer makes his strategic order decisions. ird, the contracts in this work combine the idea of advance purchase contracts, minimum commitment contracts, and wholesale price contracts. e contracts provide two different transfer payments according to the wholesale price variation based on bilateral information updating. e contracts are flexible and complemented
We show that with a good market outlook, low production cost, high information accuracy of production cost, or high information accuracy of market demand is beneficial to the manufacturer, the retailer, and the supply chain
Summary
Information largely affects the performance of supply chain firms. is is because better information contributes to better decisions, fewer mistakes, lower costs, and better products. erefore, supply chain firms prefer to make their decisions until information is updated. Ird, profits of the manufacturer, the retailer, and the supply chain are dependent on information accuracy of production cost and market demand, the production cost variation, and market outlook. The supplier updates the production cost according to the price of raw material, and the retailer can update demand information We investigate both parties’ optimal decisions under bilateral information updating, that is, the supplier gives an adjusted wholesale price and the retailer makes an adjusted order quantity. Gurnani and Tang [1] study the order decision of a retailer who faces uncertain purchase cost (wholesale price) after demand information is updated. We extend their setting by varying the wholesale price based on production cost updating. Our results complement the existing literature on the effects of information accuracy on the supply chain from the perspective of market variation
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