Coordination of a Supply Chain with Demand Stimulation and Random Demand Disruption

Coordination of a Supply Chain with Demand Stimulation and Random Demand Disruption

Tiaojun Xiao, Jia Luo, Jiao Jin
DOI: 10.4018/978-1-60960-135-5.ch001
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This chapter develops a dynamic game model of a supply chain consisting of one manufacturer and one retailer to study the coordination mechanism and the effect of demand disruption on the coordination mechanism, where the market demand is sensitive to retail price and service. We assume that the supplier and the retailer only know the distribution of the disrupted amount after the demand disruption and they share the quantity deviation costs. We find that an all-unit wholesale quantity discount-subsidy mechanism can coordinate the supply chain. We give the coordination mechanism of the supply chain after the demand disruption and find that the demand disruption remarkably influences the price-service level decisions of the centralized supply chain and the coordination mechanism of the decentralized supply chain. In particular, the expected quantity differs from the planned quantity although the penalty costs prevent from this deviation.
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Literature Review

This article is closely related to price and service decisions, supply chain coordination management and disruption management. When customers buy goods, they focus on not only price, but also service level. Thus, the firms should jointly determine retail price and service level to maximize their profits. Tsay and Agrawal (2000) study coordination strategies when the retailers use price as well as service to directly compete for end customers. Gilbert and Cvsa (2003) examine the trade-off that is faced when a firm’s channel partner has opportunities to invest in either innovation of cost reduction or quality improvement, i.e., demand enhancement. Raju and Zhang (2005) consider the price-service decisions of the dominant retailer, where the competitive fringe is a price follower and cannot provide service. Xiao and Yang (2008) study the price-service competition between two channels, where each chain consists of one supplier and one retailer. In our model, the retailer jointly determines its price and service decisions.

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