Supply commitment contract in capacity allocation games
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Supply commitment contract in capacity allocation games Yefen Chen1 · Feimin Zhong2 · Zhongbao Zhou2 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This paper considers a supply chain with one supplier and two retailers. The supplier has limited normal capacity. When the orders of two retailers exceed the capacity, the supplier can satisfy the retailers with the limited normal capacity, or he can start an emergent production to increase his capacity in a short time with a high unit production cost. When the cost of quickly expanding capacity is lower than the market price, it is profitable for the whole system to start the emergent production. But the supplier has no incentives to do additional production if his cost is higher than the wholesale price. To resolve this issue, we propose a supply commitment contract that the supplier will fully fill a retailer’s order if the retailer pays a premium to the supplier. We consider a practical setting that each retailer has private information on her average demand. Two contracting scenarios of the supplier are compared: contracting with the two retailers simultaneously (the simultaneous scenario) and sequentially (the sequential scenario). It is shown that the retailers will adopt the threshold strategy based on their private demand information to pay the premium. By numerically studies, we further illustrate the supplier’s optimal contract choices and the consequent system performance. First, the suppliers always prefer the retailers to move simultaneous although the supplier’s profit is only slightly higher than that of the sequential scenario; second, the supplier sets a lower wholesale price and a higher commitment fee in the sequential scenario than those of simultaneous scenario; finally, the sequential scenario is a better choice from the perspectives of both the whole supply chain system and the retailers. Our research recommends the sequential moving in the supply commitment contract that it benefits the whole supply chain system with only slightly less efficient for the supplier. Keywords Supply commitment · Capacity management · Signaling · Bayesian Nash equilibrium · Perfect Bayesian equilibrium
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Feimin Zhong [email protected] Yefen Chen [email protected] Zhongbao Zhou [email protected]
1
Cainiao Smart Logistics Network, Beijing, China
2
School of Business Administration, Hunan University, Changsha 410082, China
123
Annals of Operations Research
1 Introduction Supply shortage is inevitable in supply chain operations. Such supply shortage is often caused by demand fluctuations or supply disruptions. When the supply shortage occurs, a supplier usually chooses to partially fill the downstream firms’ orders with a limited capacity. However, a study by Corsten and Gruen (2004) shows that retailers can lose nearly half of the intended purchases when customers encounter stock-outs and those abandoned purchases translate into sales losses of about 4% for a typical retailer. The retailers always hope to be fully fi
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