Abstract
We investigate the production and procurement plans in a two-echelon supply chain consisting of a supplier with random yield and a retailer with stochastic demand. As the production lead time is long, the retailer would purchase options from the supplier to reserve products in advance, and then exercises options or adopts instant order to respond to market changes when demand information is updated. To provide timely order fulfilment, the supplier adopts regular and emergency production policies before and after demand information updating, respectively. We analyze the supply chain coordination problem for two cases: perfect and imperfect market signal. Our study show that a pure option contract only can coordinate supply chain with perfect market signal. For the case of imperfect market signal, we introduce a novel option contract with buyback mechanism to achieve supply chain coordination. Although conventional wisdom shows that such a responsive procurement plan with demand information updating only benefits the retailer while always hurts the supplier, we obtain a different conclusion by demonstrating that the supplier’s performance is improved by demand information updating in the presence of random yield. The intuition is that in face of random yield and demand information updating, the supplier would act conservatively to shed part of the overproduction risk by regular production, and then avoid underproduction risk by emergency production. This reactive production plan with random yield and demand information updating is new and only becomes dominant in some certain conditions. Numerical examples are presented to illustrate theoretical results.
Published Version
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