Retailer’s decision selection with dual supply uncertainties under different reliability levels of serving the market

Abstract

The main reason why supply uncertainty reduces supply chain performance is that it is difficult to estimate whether uncertain supply matches demand. Seldom do papers study retailers’ decision-selection problems according to the reliability of uncertain supply in satisfying demand. This paper considers the optimal decision selection of a retailer working with a main supplier facing supply uncertainty and a backup supplier whose yield is infinite or uncertain. The retailer can enforce demand management by adjusting prices, seeking the backup supplier to make up for the lack of products or mixing the two decisions. We provide the definition called the reliability level of serving the market (RLSM) to characterize the reliability of uncertain supply in satisfying market demand. Under different RLSMs, the participants maximize their profits based on a confidence level in three scenarios: benchmark, infinite backup supply and uncertain backup supply. Whether the main supplier determines the wholesale price or not, we find that in the benchmark, the retailer orders from the main supplier if the RLSM is low; otherwise, the retailer gives up purchasing the product. In the latter two scenarios, our results show that the particular order strategy chosen by the retailer depends on the values of the RLSM and that the retailer’s order quantity follows threshold rules. It is interesting that for different RLSMs, the retailer chooses either a price adjustment strategy, a backup supply strategy or neither of them but does not choose the mixed one, which is counterintuitive. We also derive the particular scenario that is good for the retailer by comparing the results in the three scenarios. Finally, a proper RLSM is suggested for the retailer to balance the reliability of serving the market and her profit.