Impact of an emergency order opportunity on supply chain coordination

Abstract

We consider a manufacturer-retailer supply chain in the pre-selling and selling seasons, whereby the manufacturer can offer the retailer an emergency order opportunity with a limited commitment quantity in addition to the regular order from the retailer before the selling season. Due to the short lead time for the emergency order, the manufacturer needs to prepare for it in the pre-selling season by producing more than the regular order or reserving its capacity for the responsive production. Through mathematically modelling and analyzing the supply chain, we found that, when the emergency order opportunity is provided, the manufacturer might be worse off, although the retailer is always better off. We derive the conditions whereby both the manufacturer and retailer can benefit from the emergency order, and the supply chain profit can be maximised. Further, we show that the supply chain can be coordinated by setting only the unit price and maximum commitment quantity for the emergency order. We also prove that Pareto improvement can be always achieved by setting the unit price for the regular order in addition to the unit price and maximum commitment quantity for the emergency order.