Fast-ship commitment contracts in retail supply chains

Hao Wei Chen, Diwakar Gupta, Haresh Gurnani

Research output: Contribution to journalArticlepeer-review

11 Scopus citations


This article analyzes three types of supply contracts between a supplier and a retailer when both agree as follows-if a customer experiences a stockout, then the purchased item can be shipped to the customer on an expedited basis at no extra cost. This practice is referred to as the fast-ship option in this article. In the first contract (Structure A), the supplier specifies a total supply commitment and allows the retailer to choose its split between the initial order and the amount left to satisfy fast-ship orders. In the other two contracts (Structures B and C), the supplier agrees to fully supply the retailers initial order but places a restriction on the quantity available for fast-ship commitment. The difference between the second and third contracts is that in contract Structure B the supplier moves first, whereas in contract Structure C the supplier determines its commitment after observing the retailers order. The suppliers and the retailers optimal decisions and preferences are characterized. The question of how the supplier and the retailer may resolve their conflict regarding the preferred contract type is addressed. [Supplementary materials are available for this article. Go to the publishers online edition of IIE Transactions for proofs.]

Original languageEnglish (US)
Pages (from-to)811-825
Number of pages15
JournalIIE Transactions (Institute of Industrial Engineers)
Issue number8
StatePublished - Aug 1 2013

Bibliographical note

Funding Information:
Diwakar Gupta is a Professor of Industrial & Systems Engineering at the University of Minnesota. He also holds a courtesy appointment as an affiliate senior member in the Health Services Research, Policy, and Administration Division of the School of Public Health. He earned a Ph.D. in Management Sciences from the University of Waterloo. His research focuses on healthcare delivery systems, state transportation agencies’ operations, and supply chain and revenue management. His research has been funded by a variety of federal and state agencies (e.g., DHHS, NSF, AHRQ, VHA, Mn/DOT, NSERC, SSHRC, and CHSRF), as well as companies, and his papers have appeared in all major journals in the field of operations research/management. He has held a variety of editorial appointments, including Co-Editor-in-Chief of Flexible Services and Manufacturing. He was elected in 2011 to be the chair of the Healthcare Operations Management Special Interest Group of the Manufacturing and Service Operations Management Society. More information about his research projects can be found by visiting the web page of his research lab—Supply Chain and Operations Research Laboratory—at


  • Supply contracts
  • fast-ship option
  • newsvendor model
  • partial backorders
  • stockouts


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