Impact of Reorder Option in Supply Chain Coordination

Na Song, Ximin Huang, Yue Xie, Wai Ki Ching, Tak Kuence Siu

Research output: Contribution to journalArticlepeer-review

Abstract

This paper studies the impacts of some reorder options on the performance as well as the coordination issues in a supply chain. A large cate- gory of products requires a long procurement lead time yet only has a relatively short selling season. Hence the purchase decisions usually have to be made well in advance of the opening of the sales. However, when uncertainty exists, the actual market demand may turn out to severely deviate from the initial order amount. To make up for the deficiency arising from this situation, a reorder option is introduced which renders a second manufacturing chance available shortly before he selling season. This reorder option facilitates an adjustment of the inventory level according to the realization of market demand. Since the market under investigation is facing a downward sloping demand curve, the effect of implementing this option is multi-fold. Moreover, the launch of the reorder option may also affect the decision makings at other levels of op- erations, such as altering the size of the initial order. Therefore, the overall impact of such option is not immediately clear. In this paper, it is shown that a properly designed reorder option is able to bring in profit growth and stabilize the fluctuations in the market retail price. Besides, quantity discount contracts are constructed to coordinate decisions on the initial inventory amount within the supply chain, so as to achieve higher economic efficiency. Finally, numerical examples are given to demonstrate the conclusions obtained in this paper.

Original languageEnglish (US)
Pages (from-to)449-476
Number of pages28
JournalJournal of Industrial and Management Optimization
Volume13
Issue number1
DOIs
StatePublished - Jan 2017
Externally publishedYes

Bibliographical note

Funding Information:
Acknowledgments. The authors would like to thank the referees and the editor for their helpful comments and suggestions. This research work was supported by Research Grants Council of Hong Kong under Grant Number 17301214 and HKU CERG Grants.

Publisher Copyright:
© 2017. All Rights Reserved.

Keywords

  • Coordination
  • Stackelberg game
  • quantity discount contract
  • reorder options
  • supply chain

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