Ordering policy and coordination of a supply chain with two-period demand uncertainty

We develop a two-period game model of a one-manufacturer and one-retailer supply chain to investigate the optimal decisions of the players, where stock-out and holding costs are incorporated into the model. The demand at each period is stochastic and price sharply drops in mid-life. We assume the retailer has a single order opportunity, and decides how much inventory to keep in the middle of selling season. We show that both the price-protection mid-life and end-of-life returns (PME) scheme and the only mid-life and end-of-life returns (ME) scheme may achieve channel coordination and access a ‘win-win’ situation under some conditions. The larger the lowest expected profit of the retailer, the lower the possibility of ‘win-win’ situation will be. Combined with the analysis of feasible regions for coordination policies, we find that PME scheme is not always better than ME scheme from the perspective of implementable mechanism. Finally, we find that adopting the dispose-down-to (DDT) policy can bring a larger improvement of the expected channel profit in the centralized setting, and it is interesting that by using DDT policy, double marginalization occurs only at Period 1, and however, does not plague the retailer in Period 2.     

Mean–variance analysis of a single supplier and retailer supply chain under a returns policy

In the literature, most of the supply chain coordinating policies target at improving the supply chain’s efficiency in terms of expected cost reduction or expected profit improvement. However, optimizing the expected performance alone cannot guarantee that the realized performance measure will fall within a small neighborhood of its expected value when the corresponding variance is high. Moreover, it ignores the risk aversion of supply chain members which may affect the achievability of channel coordination. As a result, we carry out in this paper a mean–variance (MV) analysis of supply chains under a returns policy. We first propose an MV formulation for a single supplier single retailer supply chain with a newsvendor type of product. The objective of each supply chain decision maker is to maximize the expected profit such that the standard deviation of profit is under the decision maker’s control. We study both the cases with centralized and decentralized supply chains. We illustrate how a returns policy can be applied for managing the supply chains to address the issues such as channel coordination and risk control. Extensive numerical studies are conducted and managerial findings are proposed.     

Manufacturer's pricing strategy and return policy for a single-period commodity

This paper presents a model for designing the pricing and return-credit strategy for a monopolistic manufacturer of single-period commodities. That is, given the unit manufacturing cost and the unit retail sale price, the manufacturer determines: (i) the unit price C to be charged against the retailer; and (ii) the unit credit V to be given to the retailer for units returned. While the manufacturer is allowed to set C and V, the order quantity Q is set by the retailer in response to the manufacturer's C and V. Among the unexpected findings derived from our model are: (i) unless an external force supports the retailer, otherwise the manufacturer can usually design a (C,V)-scheme that gives himself the lion's share of the profit; (ii) depending on the risk attitudes of the manufacturer and the retailer, the optimal return policy can range from “no returns allowed” to “unlimited returns with full credit”; (iii) instead of losing his profit share to the retailer, a return-credits agreement can often be manipulated by a shrewd manufacturer to increase his profit.     

A two-echelon supply chain of a returnable product with fuzzy demand

This study investigates the effects of the manufacturer’s refund on retailer’s unsold products for the two-echelon decentralized and centralized supply chains of a short life and returnable product with trapezoidal fuzzy demand, in which retailer returns the unsold and the customer’s unsatisfactory products to the manufacturer. For each returnable chain, we obtain the closed-form solution of order quantity to maximize the total expected profit of the supply chain, and confirm that demand fuzziness does indeed affect the order quantity and the members’ expected profits. We provide a number of managerial insights by comparing both chains and show that each chain is more advantageous to the members depending on certain condition. Our models are appropriate for a supply chain with a returnable product that lacks information about the demand.     

The impacts of the full returns policy on a supply chain with information asymmetry

In contrast to the existing return policies literature assuming that information is symmetrical between the manufacturer and the retailer, we study the full returns policy’s impact on supply chains with information asymmetry. We first study the case that the base level of the demand follows a discrete distribution with two states. We find that the retailer benefits from the full returns policy in all circumstances, while the manufacturer and the supply chain are better off under some conditions. We then consider the situation in which the base level of the demand is a type of AR(1) process.     

Analysis and design of returns policies from a supplier's perspective

This paper considers the problem of designing a returns policy in a supply chain from a supplier's perspective. The supply chain considered here is assumed to have one supplier and one retailer who serves a random demand of a product with a short life cycle. The retailer can return all the unsold products to the supplier with a partial refund. We found that if the retailer behaviour is rational, that is, ordering the optimal quantity to maximize its expected profit, then both retailer and supplier could benefit from the returns policy. Furthermore, we established that the optimal buyback price is independent of the mean of the random demand, but the variance of the demand has a significant impact on setting the optimal buyback price. The higher the variance the higher the optimal buyback price and the larger the profit gain of both parties. Numerical studies are employed to help understand the benefits of returns policies for the supplier, the retailer, and the whole supply chain.     

Coordinating a supply chain with effort and price dependent stochastic demand

This paper investigates the issue of channel coordination for a supply chain facing stochastic demand that is sensitive to both sales effort and retail price. In the standard newsvendor setting, the returns policy and the revenue sharing contract have been shown to be able to align incentives of the supply chain’s members so that the decentralized supply chain behaves as well as the integrated one. When the demand is influenced by both retail price and retailer sales effort, none of the above traditional contracts can coordinate the supply chain. To resolve this issue, we explore a variety of other contract types including joint return policy with revenue sharing contract, return policy with sales rebate and penalty (SRP) contract, and revenue sharing contract with SRP. We find that only the properly designed returns policy with SRP contract is able to achieve channel coordination and lead to a Pareto improving win–win situation for supply chain members. We then provide analytical method to determine the contract parameters and finally we use a numerical example to illustrate the findings and gain more insights.     

Coordinated stocking,clearance sales,and return policies for a supply chain

The results of a study of inter-organizational coordination effect in inventory control, return, and clearance sales policies for a distribution channel consisting of a supplier, a retailer, and a Discount Sales Outlet (DSO) are reported here. We first study the retailer–DSO coordination issues. The products are initially sold in a retail outlet. After the selling season, the leftovers are moved to a DSO for a permanent clearance sale. When the retailer and the DSO coordinate, they share information on the demand forecast and jointly decide the stocking, markdown sales, and return policies to maximize mutual profit. In the absence of coordination, the demand information is not shared by the two parties, and the decisions are decentralized to optimize the individual party’s objective function. For the supplier–retailer–DSO cooperation issue, two models are considered: namely, the Joint Optimal Model (JOM) and the Individual Optimal Model (IOM), respectively. In the IOM, the stocking, markdown sales, and return policies are individually designed by the retailer–DSO, while the supplier independently sets the terms of the return policy. We compare this approach with the JOM, in which the supplier–retailer–DSO jointly designs a mutually beneficial plan so as to maximize the supply chain joint profit. Optimal coordination policies are analyzed, and the factors that make coordination an effective approach are studied.     

On sequential commitment in the price-dependent newsvendor model

We investigate the effect of sequential commitment in the decentralized newsvendor model with price-dependent demand. Sequential commitment allows the self-profit maximizing parties to commit to contract parameters (e.g., wholesale price, retail price, buyback price and order quantity) sequentially and alternately, and we investigate its effect on the equilibrium profits of the channel and its members. Sequential commitment introduces more flexibility to contracting in the supply chain and our analysis can provide some insight to channel members who follow a bargaining process to determine the values of contract parameters. We show that the introduction of sequential commitment to the price-dependent (PD) newsvendor model with buybacks can significantly improve the manufacturer’s and the channel expected profits, but it can also decrease the retailer’s expected profit. Finally, we demonstrate that with sequential commitment, under some conditions, the choice of the first mover is endogenized and we identify the unique sequence of commitments by channel members that would arise in equilibrium.     

Manufacturer-buyer coordination for newsvendor-type-products with two ordering opportunities and partial backorders

In a recent paper [Weng, Z.K., 2004. Coordinating order quantities between the manufacturer and the buyer: A generalized newsvendor model. European Journal of Operational Research 156, 148–161], a newsvendor-type coordination model was developed for a single-manufacturer single-buyer channel with two ordering opportunities. This paper further extends the model to the case where the excess demand after the first order is partially backlogged and both parties share the manufacturing setup cost of the second order (if happened). We show that the decentralized system would perform best if the manufacturer covers utterly the second production setup cost, which is opposite to that obtained in Weng (2004). Another extension in the present paper is that in the centralized system, the second order decision is made by the buyer based on the channel’s benefit rather than based on the buyer’s benefit as in Weng (2004). It is proved that the expected profit of the system in our paper is always larger than that in Weng (2004). In order to maximize the expected profit of the channel, two coordinated policies are proposed to achieve perfect coordination: a two-part-tariff policy for the special case that the buyer pays all the manufacturing setup cost, and a revised revenue-sharing contract for the case that two parties share the manufacturing setup cost.     

The optimal pricing and ordering policy for an integrated inventory model when trade credit linked to order quantity

In traditional inventory models, it is implicitly assumed that the buyer must pay for the purchased items as soon as they have been received. However, in many practical situations, the vendor is willing to provide the buyer with a permissible delay period when the buyer’s order quantity exceeds a given threshold. Therefore, to incorporate the concept of vendor–buyer integration and order-size-dependent trade credit, we present a stylized model to determine the optimal strategy for an integrated vendor–buyer inventory system under the condition of trade credit linked to the order quantity, where the demand rate is considered to be a decreasing function of the retail price. By analyzing the total channel profit function, we developed some useful results to characterize the optimal solution and provide an iterative algorithm to find the retail price, buyer’s order quantity, and the numbers of shipment per production run from the vendor to the buyer. Numerical examples and sensitivity analysis are given to illustrate the theoretical results, and some managerial insights are also obtained.     

Flexible long-term capacity planning in closed-loop supply chains with remanufacturing

We deal with long-term demand-driven capacity planning policies in the reverse channel of closed-loop supply chains (CLSCs) with remanufacturing, under high capacity acquisition cost coupled with uncertainty in actual demand, sales patterns, quality and timing of end-of-use product returns. The objective is to facilitate the decision-making when the management faces the dilemma of implementing either a strategy of early large-scale investments to benefit from economies of scale and capacity readiness, or a flexible strategy of low volume but more frequent capacity expansions. We consider a CLSC with two sequential product-types. We study the system’s response in terms of transient flows, actual/desired capacity level, capacity expansions/contractions and total supply chain profit, employing a simulation-based system dynamics optimization approach. Extensive numerical investigation covers a broad range of real-world remanufacturable products under alternative scenarios in relation to the market preference over product-types. The key findings propose flexible policies as improved alternatives to large-scale capacity expansions/contractions in terms of adaptability to the actual pattern of end-of-use product returns and involved risk in the investments’ turnover. Flexible policies are also proposed as practices to avoid overcapacity phenomena in collection and remanufacturing capacity and as robust policies to product demand. Their implementation is revealed to be even more important for the case of remanufacturing, when a high capacity acquisition unit-cost ratio (remanufacturing/collection) is coupled with strong economies of scale. Finally, results under different information sharing structures show changes in remanufacturing policies, thus justifying the importance of coordination between the decision-maker and the distributor.     

Coordinated decisions for substitutable products in a common retailer supply chain

This paper studies coordination mechanisms in a supply chain which consists of two suppliers with capacity uncertainties selling differential yet substitutable products through a common retailer who faces price-sensitive random demand of these two products. We develop in a noncompetitive setting three coordination models – revenue sharing, return policy, and combination of revenue sharing and return policy – and contrast them with a basic and uncoordinated model. We are able to establish the ordinal relationship among the retailer’s ordering and pricing decisions and analytically compare the performances between certain models when two suppliers are identical. We find that the retailer’s ordering and pricing decisions in the model with return policy in the case of identical suppliers are independent of demand or supply uncertainty. Our numerical results reveal that the performances of coordination models in the case of nonidentical suppliers resemble those in the case of identical suppliers. We find that the retailer will place a larger order quantity in models where her average cost per unit sold is smaller. We also find that product substitutability and uncertainties have different effects on chain performances.     

Channel coordination under two-level trade credits and demand uncertainty

This study considers a decentralized supply chain where a retailer has an opportunity to order a product from a supplier prior to the sales season to satisfy uncertain demand. The retailer provides trade credit to end customers and makes credit period and order quantity decisions to maximize profits. The end demand is both random and credit period-dependent. On the basis of the newsvendor model, this paper focuses on channel coordination when a retailer provides trade credit to end customers. When the supplier also provides trade credit to the retailer, we show that the traditional trade credit contract cannot coordinate the channel. Four composite contracts based on trade credit (trade credit cost sharing with buy back or quantity flexibility; modified trade credit with buy back or quantity flexibility) are provided to induce the retailer to make decisions while optimizing the channel profit. This paper shows that the retailer provides a longer credit period to its customers and orders a larger quantity from the supplier under the composite contracts. With these contracts, the profit sharing between both parties depends on the wholesale price (Pareto improvement) for the fixed retail price and the purchasing cost.     

The impact of consumer returns policies on consignment contracts with inventory control

We consider a consignment contract with consumer non-defective returns behavior. In our model, an upstream vendor contracts with a downstream retailer. The vendor decides his consignment price charged to the retailer for each unit sold and his refund price for each returned item, and then the retailer sets her retail price for selling the product. The vendor gets paid based on net sold units and salvages unsold units as well as returned items in a secondary market. Under the framework, we study and compare two different consignment arrangements: the retailer/vendor manages consignment inventory (RMCI/VMCI) programs. To study the impact of return policy, we discuss a consignment contract without return policy as a benchmark. We show that whether or not the vendor offers a return policy, it is always beneficial for the channel to delegate the inventory decision to the vendor. We find that the vendor’s return policy depends crucially on the salvage value of returns. If the product has no salvage value, the vendor’s optimal decision is not to offer a return policy; otherwise, the vendor can gain more profit by offering a return policy when the salvage value turns out to be positive.     

An uncooperative order model for items with trade credit,inventory-dependent demand and limited displayed-shelf space

This paper considers a two-echelon supply chain where a supplier sells a single product through a retailer, who faces an inventory-dependent demand. The supplier hopes to incentive the retailer to order more items by offering trade credit. The retailer places the ordered items on the display shelf (DS) with limited space and stocks the remaining items (if any) that exceed the shelf capacity in his/her backroom/warehouse (BW). From the supplier’s perspective, we focus mainly on under which conditions the supplier should offer trade credit and how he/she should design such trade credit policy and corresponding ordering policy to obtain much more benefits. From the retailer’s perspective, we discuss whether the retailer needs BW and exactly how many items need to be stocked in BW when the supplier offers trade credit. We formulate a “supplier-Stackelberg” game model, from which we obtain the conditions under which the presented simple trade credit policy not only increases the overall chain profit but also each member’s profit. We also show that the trade credit policy is always more beneficial to the retailer than to the supplier if it is offered.     

Capacity allocation,ordering, and pricing decisions in a supply chain with demand and supply uncertainties

This paper studies coordinated decisions in a decentralized supply chain that consists of one Original Equipment Manufacturer (OEM), one manufacturer, and one distributor, and possesses uncertainties at both demand and supply sides. These uncertainties emerge, respectively, from random demand the distributor faces and randomness of capacity with which the OEM processes the manufacturer’s outsourced quantity. Sharing supply and demand uncertainty information along the supply chain enables us to develop three models with different coordination efforts—the OEM and manufacturer coordination, the manufacturer and distributor coordination, and the OEM, manufacturer, and distributor coordination—and quantify the coordinated decisions in these three models. Our analysis of these coordination models suggests that coordinating with the OEM improves the manufacturer’s probability of meeting downstream demand and his expected profit, yet coordinating with the manufacturer is not necessarily beneficial to the OEM when downstream coordination is lacking.     

Channel incentives in sharing new product demand information and robust contracts

Demand for a new product is often highly uncertain. As the developer of a new product, the manufacturer may reduce the uncertainty of the product’s demand through observing progress in his product development process or receiving demand signals directly from customers. This paper first shows that a centralized channel always benefits from improved demand information. Yet, to realize this benefit in a decentralized manufacturer–retailer channel, the manufacturer needs to disclose his private demand information to the retailer. We show that the manufacturer’s incentive to share his improved demand information depends on the supply contract signed with the retailer. Furthermore, mandating the manufacturer to disclose his improved demand information can actually reduce the total channel profit. We provide managerial insights by analyzing three widely used contract forms. We investigate whether these contracts are robust under an unanticipated demand information update observed by the manufacturer. We show that the quantity flexibility contract with a high return rate is not robust. The buyback contract, however, is robust and always achieves information sharing while preserving channel performance.     

Cooperative advertising in a distribution channel with fairness concerns

Cooperative (co-op) advertising has been widely used in practice and employed as a strategy to improve the performance of a distribution channel. It is known from the existing models that co-op advertising could not achieve the channel coordination (i.e., maximize the total channel profit). In this paper, we consider a distribution channel consisting of a single manufacturer and a single retailer, and investigate the effect of the retailer’s fairness concerns. Applying the equilibrium analysis, we obtain the following results: (1) Channel coordination can be achieved if the retailer has fairness concerns and model parameters satisfy certain conditions. (2) Although both channel members become better off with co-op advertising if neither channel member has fairness concerns, we find situations where co-op advertising brings detrimental effects to the retailer if the retailer has fairness concerns. (3) The retailer’s fairness concerns may increase or decrease the equilibrium participation rate, the equilibrium advertising effort, and the equilibrium profit of the manufacturer and the whole channel. (4) We identify the conditions under which the effectiveness of co-op advertising can be improved or reduced by the retailer’s fairness concerns. As long as co-op advertising can bring extra profit to the manufacturer, the retailer’s fairness concerns could improve the effectiveness of the co-op advertising. (5) There exists a Pareto improvement for the profits of both the manufacturer and the retailer when a retailer without fairness concerns becomes fair-minded.     

Retail service for mixed retail and E-tail channels

Together with regular retail channel, a firm can distribute products directly through Internet (referred to as an “e-tail” distribution channel). The competitive edge of the retail channel lies in more value-added services, some of which are unavailable through the e-tail channel. We consider a model mixed with retailing and e-tailing distribution channels where the service level and price decision are made, respectively, ex ante and ex post demand realizations. From the firm’s perspective of managing the two channels, we acquire the optimal decisions and characterize the effects of the demand uncertainty on the firm’s optimal retail service and expected profit. Applying stochastic comparison method, we show the firm’s retail service and profit both increase in the demand mean, and the firm profits from the increase of the convex order of the demand by decreasing his service level. Further, if the coefficient of the demand increases, we characterize that the firm benefits from it. Finally, several numerical studies are presented to gain insights.