A Supply Chain with a Service Requirement for Each Market Signal

Production and Operations Management, Vol. 16, No. 3, pp. 322-342, May-June 2007

21 Pages Posted: 12 Feb 2008

See all articles by Houmin Yan

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management

Hanqin Zhang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Jing Zhou

University of North Carolina (UNC) at Charlotte

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

Suggested Citation

Yan, Houmin and Zhang, Hanqin and Sethi, Suresh and Zhou, Jing, A Supply Chain with a Service Requirement for Each Market Signal. Production and Operations Management, Vol. 16, No. 3, pp. 322-342, May-June 2007. Available at SSRN: https://ssrn.com/abstract=1092207

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management ( email )

Shatin, New Territories
Hong Kong

Hanqin Zhang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences ( email )

Zhong-Guan-Cun-Dong-Lu 55, Haidian District
Beijing, Beijing 100080
China

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

Jing Zhou

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

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