Commitment decisions with demand information updating and a capital‐constrained supplier

• Date: 01 September 2020
• Author: Youzi Zhai,Lijun Ma,Weili Xue
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/itor.12722

Intl. Trans. in Op. Res. 27 (2020) 2294–2316

DOI: 10.1111/itor.12722

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IN OPERATIONAL

RESEARCH

Commitment decisions with demand information updating

and a capital-constrained supplier

Yo u z i Z h a i a, Weili Xueaand Lijun Mab,∗

aSchool of Economics and Management, Southeast University, Nanjing 210096, P.R. China

bDepartment of Management Science, College of Management, Shenzhen University, Shenzhen 518060, P.R. China

E-mail: zhaiyouzi@qq.com [Zhai]; weili@seu.edu.cn [Xue]; ljma@szu.edu.cn [Ma]

Received 7 January 2019; received in revised form 1 July 2019; accepted 27 August 2019

Abstract

In this paper, we study a single two-echelon supply chain with a capital-constrained supplier (manufacturer)

and a retailer. The supply chain faces a stochastic demand. As the production lead time is long, the market

demand is updated during the supplier’sproduction lead time. The supplier needs to determine the production

quantity based on the original demand forecast, and the retailer needs to determine the time and quantity

to order. The retailer can place an order before the supplier’s production (preorder) or after the supplier’s

production (regular order). We prove the existence of optimal equilibrium solutions under both preorder

and regular order strategies. We analytically investigate the order strategies for the supply chain agents under

perfect and worthless market information updating. Moreover, we numerically analyze the impact of the

information updating quality on the order strategy selection, and the effect of exogenous shocks on the

supply chain agents.

Keywords:Stackelberg game; information updating; financial constraint

1. Introduction

As modern business is usually characterized by long productionlead time, fast product development

cycle, short product life cycle, and short selling season, it is important to take advantage of the

market signal and update the demand accordingly.For most seasonal products, the marketdemand

is uncertain until the selling season starts. Managers usually use historical data to make their initial

order decisions. However, due to the fast changing environment, the historical data may not be

precise to determine the optimal order quantities. As a result, most companies use the market signal

to update the demand and thus improve the optimal order decisions as time passes. Usually, there

are two chances to produce/order during the selling season. This first chance is at the time with an

initial forecast about the demand and the second chance is at the time with a market signal. This

∗Corresponding author.

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Y. Zhai et al. / Intl. Trans. in Op. Res.27 (2020) 2294–2316 2295

practice is called the quick response (QR) program (Iyer and Bergen,1997). QR strategy adopts the

two order strategies by shortening lead time. The first order uses less accurate demand information

but has a cheaper wholesale price, and the second order takes advantage of the market signal but

has an expensive wholesale price, and thus has more accurate demand information to make the

order decision.

Yet in some industries such as appliance retailing, the retailer can only take one instance to order,

either order early with no marketsignal (preorder) or order later with a market signal (regular order).

Forexample, Suning, a topmost appliance chain store in China, in its early years of development has

quite little bargaining power with respect to its supplier such as the air-conditioning manufacturer.

When offered with two order times by the manufacturer, Suning usually wants to order early to

take advantage of the cheaper wholesale price (Cheng, 2006). If the retailer chooses to order early

before the production of the supplier, the retailer will take all the risk of the supply chain, which is

the demand uncertainty in our setting. However, if the retailer chooses to delay the order after the

production of the supplier, the retailer will take advantage of the market signal and the demand risk

will be shared by the supplier and the retailer.Based on the market signal during the production lead

time, the supplier offers the retailer with two order times, namely, the retailer can either choose to

order before the production begins (preorder) or order after the production begins (regular order).

Thus, the retailer needs to determine the order time as well as the order quantity. In this paper, we

only consider a supply chain with the supplier as the leader, which is common in many industries

such as appliance and automobile industries. We use a Stackelberg game to study the interactions

between the supplier and the retailer. We assume that information is symmetric for the supply chain

agents. First, the supplier offers two order times, order early or order regularly to the retailer with

an exogenously given wholesale price. Then, the retailer determines the order time and the order

quantity. If the retailer chooses to order early (preorder), the supplier determines the production

quantity as exactly the preorder quantity from the retailer. However, if the retailer chooses to order

regularly (regular order) and take advantage of the market signal, the supplier will determine the

production quantity based on the initial demand forecasting.

Different from Ferguson et al. (2005), we assume that the supplier is financially constrained,

which is common in practice. In reality, firms usually need to finance their operationsfrom external

capital markets through short-term loans or issuing corporate bonds. For example, when banks

or individual investors determine the fee of capital lending, they are generally concerned with the

default risk. If the borrowing firm has a highly fluctuating demand, it will also need a high interest

rate for compensation. This, in return, will influence the firm’s operational decisions in high-risk

business.Moreover, the counterparty’s financial state will also affect the retailer’s ordering behavior.

However, the existing research on information updating pays very few attentions to the impact of

financial constraint. Thus, it is important to jointly consider the supply chain decision with demand

information updating and the capital constraint.

Specifically, in this paper, we analyze the case in which the wholesale price is exogenously given,

this reflects the situation that the market is full of competition and neither the supplier nor the

retailer can influence the wholesale price. Thus, for the supply chain agents, with a given wholesale

price, is it beneficial to delay the order to take advantage of the market signal? And for the supplier

with financial constraint, how to make the productiondecision with an exogenously given wholesale

price? Also, for the retailer, how does the production decision from the capital-constrained supplier

affect the retailer’s order strategy? We will try to solve these problems in this paper.

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