Optimal multichannel distribution strategies with limited capacity and uncertain demand

Abstract

In reality, either the supplier or the manufacturer may launch new high-tech final products, in which case the demand is highly uncertain and the supplier’s capacity for the critical component may be limited. This paper establishes a game-theoretic model consisting of a manufacturer and a supplier with constrained capacity who not only supplies the critical component to the downstream manufacturer but also produces its final products. In this case, both the manufacturer and supplier face the newsvendor problem. We investigate the supplier’s optimal distribution strategies, the manufacturer’s ordering decisions, and the impact of the supplier’s limited capacity on supply chain operations when both the manufacturer and supplier confront demand uncertainty in the end market. Our results show that the supplier can choose among different distribution strategies, that is, the dual channel, the supplier-only, and the sole seller in the market, depending on the capacity and the relative profitability of the supplier’s and the manufacturer’s final products. Overall, the limited capacity will result in a significant loss to the supply chain. Further, double marginalization can be alleviated by the limited capacity and its variation with capacity depends on the relative profitability of the supplier’s and manufacturer’s final products. To coordinate the supply chain, we examine different contracts and demonstrate that our proposed two-sided revenue-sharing contract and the two-sided buyback contract could achieve effective coordination.