Emergency order response strategy under supply chain collaboration

Abstract

This paper studies the production and ordering response strategy with uncertain demand in two-tier supply chain composed of a social planner and a manufacturer. In light of the uncertain market demand, the manufacturer needs advance production before receiving the regular order from social planner to make quick response, and reserve some additional production capacity in case of emergency orders. We derive the conditions whereby the manufacturer can benefit from the emergency production and emergency orders and the social planner is willing to place the emergency orders and upgrade the optimal decisions with Pareto improvement. Besides, we find that, (1) the unit cost for emergency order is either too high or low, which might be worse off if the emergency order opportunity is provided to social planner; (2) even if the centralized case is better than the decentralized case in terms of the total cost, the social planner prefers decentralized case to centralized case. Finally, we use the real data to prove the theoretical analysis and show that the emergency supply mechanism can almost meet domestic demand. At the same time, we determine the optimal unit cost for emergency order based on total cost and respective costs for both parties.