Pricing and production decisions in a dual-channel supply chain when production costs are disrupted

Abstract

This paper studies a pricing and production problem in a dual-channel supply chain when production costs are disrupted. When a production cost disruption occurs, the original production plan which is designed based on the initially estimated production cost needs to be revised. It is necessary to explicitly consider possible related deviation costs caused by changes of the original production plan. We consider this problem in the centralized and decentralized dual-channel supply chain, respectively. The optimal prices and production quantity under production cost disruptions are derived. We find that the original production plan has some robustness with production cost disruptions. Only when the production cost disruption exceeds some thresholds will the decision-maker change the production quantity. The production cost disruption robustness region in the centralized dual-channel supply chain is the same as that in the decentralized dual-channel supply chain. In the centralized dual-channel supply chain, it is always beneficial for the central decision-maker to take timely response to the disruptions and utilize the revised strategy under production cost disruptions. In the decentralized dual-channel supply chain we characterize a threshold. If customers' preference for the direct channel is below the threshold, the optimal direct sale price equals the wholesale price; otherwise, the optimal direct sale price and wholesale price equals the optimal direct sale price and retail price in the centralized dual-channel supply chain. The manufacturer always gets better off if he takes timely response to the production cost disruptions, while the retailer gets better off only if the production cost disruption is negative and gets worse off otherwise.