Production lead-time hedging and order allocation in an MTO supply chain

Abstract

In an make-to-order (MTO) supply chain, as consumers are increasingly sensitive to the delivery time and delivery reliability, quoting a short delivery time while delivering on-time is the major challenge for the retailer. To avoid tardy delivery, the retailer usually requires the manufacturer provide reliable delivery service by hedging against its production uncertainty, which is termed as production lead-time hedging (PLTH). To examine the effect of PLTH strategy on delivery time decision and profits for both retailer and manufacturer, we develop two game models. To our best knowledge, this paper is among the first that study delivery time quotation while considering delivery reliability and production uncertainty control. Furthermore, as multi-sourcing becomes more and more popular, we extend the basic single sourcing model to the multi-sourcing model. The main methodological contribution is the development of a traceable game theoretical model that links operational hedging decisions and order allocation implication, whilst considering delivery unreliability. Our findings show that adopting the PLTH strategy, which enables the retailer to quote a short delivery time in most cases, is the dominant strategy for the retailer. Especially, the multi-sourcing outperforms the single sourcing. The single sourcing Nash game also benefits the manufacturer. However, in the single sourcing Stackelberg game, the manufacturer will join the PLTH strategy only when the consumer's delivery time sensitivity is not sufficiently large. Interesting, when the consumer's delivery time sensitivity becomes sufficiently large or the consumer's on-time delivery sensitivity becomes sufficiently small, the retailer will scarify the on-time delivery reliability.