Reactive Production with Preprocessing Restriction in Supply Chains with Forecast Updates

Abstract

This study considers a two-mode production system that allows the supply chain to utilize a fast reactive production with improved demand information before the selling season. However, the reactive production quantity is limited by the required preprocessing decision before the demand information is updated. The condition under which adding a reactive production is beneficial to the supply chain depends on the demand forecast updating process, besides the cost parameters. To illustrate the benefit of this system, the two-mode production system is compared with two single-mode production systems, one that is purely speculative and the other purely reactive. In addition, a pricing contract with a return policy is demonstrated to efficiently coordinate the supply chain since the contract allows the maximization and arbitrary allocation of the total supply chain profit. Contrary to the results in existing literature, this result continues to hold whether demand information is known to the manufacturer or not. Numerical examples demonstrate that the benefit of the two-mode production can be as large as 104% when the preprocessing limit exists.