Equilibrium Strategy of Production and Order in a Two-Echelon Supply Chain with Demand Information Updates and Capacity Restriction

Abstract

This paper studies production-and-order strategies under three production systems in which the supplier’s production quantity is constrained by the upfront preparations of capacity due to a long production season. The newsvendor-like retailer may make an advance order at the beginning of the production season, relying on early demand information, or a delay order at the end of the production season, depending on the updated demand information. In two special cases of perfect and imperfect demand information updates, this paper analytically derives the optimal decision equilibrium of a supplier-led Stackelberg game for three production-and-order strategies: (1) advance order under single regular production, (2) delay order under single emergency production and (3) delay order under two-mode production. In the case of perfect information updates, all three strategies likely become the equilibrium strategies that depend on the instant wholesale price and on the production cost for emergency production. In the case of imperfect information updates, the strategy of advance orders under regular production represents the unique equilibrium of the supply chain. Furthermore, the effect of general demand information updates on the equilibrium strategy is analyzed. Counterintuitively, the research results show that the retailer is more profitable with imperfect information updates than with perfect information updates when a high instant wholesale price is charged. In sharp contrast to previous studies, where the supplier always benefits from a two-mode production system due to its flexibility, our results indicate that the supplier would prefer a single regular production system when the production cost under emergency production is large, or the quality of demand information is high. Numerical examples verify our theoretical results.