Supply Chain Coordination with Multiple Shipments: The Optimal Inventory Subsidizing Contracts

Abstract

We study a supply chain involving a supplier–retailer relationship. When production lead-time is long and the selling season is short, the retailer has to place an order ahead of the season, which resembles the classical Newsvendor model. However, we consider the situation when the supplier agrees to deliver the order in multiple shipments in the season, and then the retailer needs to determine the quantity and/or timing of each shipment. Under a centralized setting, we derive the optimal quantity and/or timing decisions of the retailer. Under a decentralized setting, incentive misalignment arises from ineffective allocation of inventory costs between the parties, in addition to the well- known double marginalization effect. Hence, we devise an incentive contract, which involves a risk-sharing mechanism at the end of the season and an inventory subsidizing scheme for the entire season; in practice, the inventory subsidizing scheme can be implemented in different ways, such as a direct subsidizing scheme or a delayed-payment scheme. The proposed contract can achieve channel coordination and Pareto optimality. Furthermore, we can show that the inventory subsidizing scheme plays a key role in channel coordination because without the inventory subsidizing scheme, the loss of supply chain efficiency is almost always significant.

Quick Response in Supply Chains with Stochastically Risk Sensitive Retailers*

“…First, quick response supply chain management is a well-researched area (e.g., Iyer & Bergen, 1997;Chen, Lee, & Moinzadeh, 2016). The basic concept of quick response is to shorten lead time and let the supply chain be responsive to market changes.…”

“…Motivated by the popularity of quick response in supply chain management (Chen et al, 2016) and the importance of stochastic risk sensitivity in economics and business decision making (Anderson & Mellor, 2009;Ludvig et al, 2015), we conduct an analytical study on the values of quick response in a supply chain with a stochastically risk-sensitive retailer.…”

Stochastic Production Capacity: A Bane or a Boon for Quick Response Supply Chains?

“…Quick response (QR) is a common practice in many industries facing highly volatile demand such as apparel and consumer electronics (Choi, Zhang, & Cheng, ). Many fashion companies such as Uniqlo, Mango, Zara, and H&M are using the QR strategy to respond to ever‐changing customer preferences in a timely manner (Calvo & Martínez‐de‐Albéniz, ; Chen, Lee, & Moinzadeh, ). QR intends to shorten the lead time and allows retailers to postpone their order placements to improve demand forecast by gathering updated market information.…”

“…The popularity and importance of QR in practice has attracted a great deal of research attention (eg, Chen et al, ; Lin & Parlaktürk, ). The majority of the existing QR studies are conducted under the assumption that the manufacturer's QR capacity is infinite and it can fulfill all the retailer's orders.…”

“…Therefore, in addition to demand risk, the retailer may suffer supply risk under QR. For example, in the apparel industry, although the retailers hope to be able to submit orders closer to the season in order to better cope with market demand uncertainty, according to the interviews conducted by Chen et al (), the majority of them instead placed orders far ahead of the selling season. The reasons include long production time (which also relates to capacity availability) and transit lead‐time of apparel suppliers.…”