Supply Chain Coordination in 2-Stage-Ordering-Production System with Update of Demand Information

Abstract

It is necessary for a retailer to improve responsiveness to uncertain customer demand in product sales. In order to solve this problem, this paper discusses an optimal operation for a 2-stage-ordering-production system consisting of a retailer and a manufacturer. First, based on the demand information estimated at first order time <TEX>$t_1$</TEX>, the retailer determines the optimal initial order quantity <TEX>$Q^*_1$</TEX>, the optimal advertising cost <TEX>$a^*_1$</TEX> and the optimal retail price <TEX>$p^*_1$</TEX> of a single product at <TEX>$t_1$</TEX>, and then the manufacturer produces <TEX>$Q^*_1$</TEX>. Next, the retailer updates the demand information at second order time <TEX>$t_2$</TEX>. If the retailer finds that <TEX>$Q^*_1$</TEX> dissatisfies the demand indicated by the demand information updated at <TEX>$t_2$</TEX>, the retailer determines the optimal second order quantity <TEX>$Q^*_2$</TEX> under <TEX>$Q^*_1$</TEX> and adjusts optimally the advertising cost and the retail price to <TEX>$a^*_2$</TEX> and <TEX>$p^*_2$</TEX> at <TEX>$t_2$</TEX>. Here, decision-making approaches for two situations are made-a decentralized supply chain (DSC) whose objective is to maximize the retailer's profit and an integrated supply chain (ISC) whose objective is to maximize the whole system's profit. In the numerical analysis, the results of the optimal decisions under DSC are compared with those under ISC. In addition, supply chain coordination is discussed to adjust the unit wholesale price at each order time as Nash Bargaining solutions.