Disruption management for a dominant retailer with constant demand-stimulating service cost

Abstract

In this paper, we consider coordination model of a one-manufacturer and multi-retailer supply chain with a dominant retailer’s sales promotion opportunity and possible demand disruption. An appropriate contractual scheme can be used to fully coordinate the supply chain even if the demand disruption occurs. In our study, we also analyze how the demand disruption affects the coordination mechanism. When the demand is disrupted, the manufacturer only needs to adjust the maximum variable wholesale price and the subsidy rate under the linear quantity discount scheme. For each case of the demand disruption, we find that the higher the market share of the dominant retailer, the lower its average wholesale price will be. Meanwhile, the higher service cost leads to the higher subsidy rate provided by the manufacturer. The optimal wholesale/retail price, order quantity and subsidy rate can be greatly influenced by the demand disruption. If the disrupted amount of demand is sufficiently small, however, the manufacturer needs to take some special measures to prevent the retailers from deviating the order quantity of the original plan. To demonstrate these findings, we illustrate our propositions by numerical examples.