A Supply Chain with a Service Requirement for Each Market Signal

Abstract

We study a single-period two-stage service-constrained supply chain with an information update. The buyer has two procurement opportunities with the second one after observing a market signal, which updates the demand forecast. He also commits to a service level after observing the market signal. We derive his optimal ordering decisions and show that the critical market signal, the optimal first-stage order quantity, and the optimal expected profit are monotone with respect to the target service level. We also discuss the impact of the forecast quality on the optimal decisions. We show that the optimal first-stage order quantity may not be monotone with respect to information accuracy, as is in the case without the service constraint. In addition, we extend our analysis to the situation when an order cancellation is allowed upon the observation of the market signal. We also compare the results obtained for the problems with and without an order cancellation. Finally, we discuss the supply chain coordination issue and find that a buyback contract can also coordinate the supply chain in the presence of the service constraint.

Keywords: supply chain, information update, customer service level, dynamic programming, forecasting, signalling, coordiantion

JEL Classification: C61, M11, D8