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Ship-to-order supplies: Contract breachability and the impact of a manufacturer-owned direct channel

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  • Kogan, Konstantin
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    Abstract

    We address the issue of contract breachability in a supply chain involving a retailer and a manufacturer operating under ship-to-order contract terms and stochastic demands. The manufacturer is required to fulfill the retailer’s demands on a continuous basis with little or no advance notice. The issue in such an environment is whether the retailer can “naively” assume that she will get a very high fill rate from the manufacturer and therefore has no need for contract penalties in case the manufacturer’s inventory falls short. We suggest a stochastic calculus framework to study the problem and derive a condition when the retailer’s naïve assumption is justified since the probability of stock-outs of the manufacturer is negligible. That is, the ship-to-order contract will not be breached and the fill rate will be more than a predetermined threshold. Furthermore we find that although the manufacturer-owned direct channel generates more revenue and may reduce the volatility of both inventory and production orders, the ratio between expected direct channel and retail sales affects the benefits.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 218 (2012)
    Issue (Month): 1 ()
    Pages: 113-123

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    Handle: RePEc:eee:ejores:v:218:y:2012:i:1:p:113-123

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    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Supply chain management; Gaming; Uncertainty modeling; Inventory;

    References

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    1. Jehoshua Eliashberg & Richard Steinberg, 1987. "Marketing-Production Decisions in an Industrial Channel of Distribution," Management Science, INFORMS, vol. 33(8), pages 981-1000, August.
    2. Chang,Fwu-Ranq, 2004. "Stochastic Optimization in Continuous Time," Cambridge Books, Cambridge University Press, number 9780521834063, April.
    3. Frank Chen & Zvi Drezner & Jennifer K. Ryan & David Simchi-Levi, 2000. "Quantifying the Bullwhip Effect in a Simple Supply Chain: The Impact of Forecasting, Lead Times, and Information," Management Science, INFORMS, vol. 46(3), pages 436-443, March.
    4. Yossi Aviv, 2007. "On the Benefits of Collaborative Forecasting Partnerships Between Retailers and Manufacturers," Management Science, INFORMS, vol. 53(5), pages 777-794, May.
    5. Stephen C. Graves, 1985. "A Multi-Echelon Inventory Model for a Repairable Item with One-for-One Replenishment," Management Science, INFORMS, vol. 31(10), pages 1247-1256, October.
    6. Desai, Vijay S., 1996. "Interactions between members of a marketing-production channel under seasonal demand," European Journal of Operational Research, Elsevier, vol. 90(1), pages 115-141, April.
    7. Gérard P. Cachon & Taylor Randall & Glen M. Schmidt, 2007. "In Search of the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 9(4), pages 457-479, April.
    8. Kogan, Konstantin & Herbon, Avi, 2008. "A supply chain under limited-time promotion: The effect of customer sensitivity," European Journal of Operational Research, Elsevier, vol. 188(1), pages 273-292, July.
    9. Haurie, A., 1995. "Time scale decomposition in production planning for unreliable flexible manufacturing systems," European Journal of Operational Research, Elsevier, vol. 82(2), pages 339-358, April.
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