TY - JOUR
T1 - Designing supply contracts
T2 - buy-now, reserve, and wait-and-see
AU - Chen, Jen Yi
AU - Dada, Maqbool
AU - Hu, Qiaohai (Joice)
N1 - Publisher Copyright:
Copyright © 2016 “IIE”.
PY - 2016/10/2
Y1 - 2016/10/2
N2 - We consider three types of purchase contracts a manufacturer could offer in order to maximize its profit when supplying a retailer that uses responsive pricing to sell in an uncertain market: buy-now before the selling season starts, reserve stock for possible future purchase, and wait-and-see the market before making purchases. The existing literature has shown that adding a recourse purchase—i.e., the wait-and-see alternative—is always beneficial for the retailer who faces an uncertain demand. We find that this is not necessarily the case for the manufacturer who supplies the retailer, as its optimal contract mix depends on the market uncertainty as well as its production characteristics. The manufacturer should offer only the buy-now alternative if its recourse production is much more costly than advance production. As the recourse production cost decreases, the manufacturer should add a second contract to the portfolio: initially the reserve contract and then the wait-and-see contract. However, when the recourse production is cheaper than advance production, the manufacturer should drop the buy-now contract from the mix. As such, it is only in a small region, which shrinks with decreasing uncertainty in demand, that the manufacturer finds it optimal to offer all three purchasing alternatives.
AB - We consider three types of purchase contracts a manufacturer could offer in order to maximize its profit when supplying a retailer that uses responsive pricing to sell in an uncertain market: buy-now before the selling season starts, reserve stock for possible future purchase, and wait-and-see the market before making purchases. The existing literature has shown that adding a recourse purchase—i.e., the wait-and-see alternative—is always beneficial for the retailer who faces an uncertain demand. We find that this is not necessarily the case for the manufacturer who supplies the retailer, as its optimal contract mix depends on the market uncertainty as well as its production characteristics. The manufacturer should offer only the buy-now alternative if its recourse production is much more costly than advance production. As the recourse production cost decreases, the manufacturer should add a second contract to the portfolio: initially the reserve contract and then the wait-and-see contract. However, when the recourse production is cheaper than advance production, the manufacturer should drop the buy-now contract from the mix. As such, it is only in a small region, which shrinks with decreasing uncertainty in demand, that the manufacturer finds it optimal to offer all three purchasing alternatives.
KW - Supply chain management
KW - game theory
KW - inventory management
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U2 - 10.1080/0740817X.2015.1110649
DO - 10.1080/0740817X.2015.1110649
M3 - Article
AN - SCOPUS:84961204432
SN - 2472-5854
VL - 48
SP - 881
EP - 900
JO - IIE Transactions (Institute of Industrial Engineers)
JF - IIE Transactions (Institute of Industrial Engineers)
IS - 10
ER -