Coordination by quantity flexibility contract in a two-echelon supply chain system: Effect of outsourcing decisions

Abstract

This paper investigates a two-echelon supply chain (SC) with one product and two members, including one manufacturer and one retailer under stochastic demand. A quantity flexibility (QF) contract is applied where the retailer is allowed to update its primary order both downwards and upwards to share overstocking and overproduction risks between both channel members. In the proposed QF model, it is possible for the manufacturer to outsource production based on a reservation fee. The manufacturer's decision variable is in-house/outsource amount while the retailer decides on order quantity. Numerical experiments and sensitivity analyses have been implemented on the contract parameters. The results indicate that outsourcing a fraction of production not only increases the profit of the supply chain but can also increase each member's profit.