Efficient coordination of supply contracts with demand learning and two production modes

Abstract

We study a supply contract between a manufacturer and a retailer in a two-period newsvendor model with demand learning. The retailer needs to determine the order quantity at the beginning, and can adjust the amount at the end of the first period after receiving the updated demand information, as the demand forecast for the second period (sales period) is dependent on the order quantity during the first period (reservation period). Compared to the traditional buy-back contract, although the quantity adjustment (QA) can yield higher profits for both parties, the channel profit improvement by QA decreases with demand uncertainty.