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Commitment-penalty contracts in drop-shipping supply chains with asymmetric demand information

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  • Gan, Xianghua
  • Sethi, Suresh P.
  • Zhou, Jing

Abstract

We study a drop-shipping supply chain in which the retailer receives a customer's order and the supplier fills it. In such a chain, the supplier keeps inventory and bears inventory risks; the retailer focuses on marketing and customer acquisition, and forwards the orders to the supplier. The retailer usually has better customer demand information, and may send an over-estimated demand forecast to maximize her own interest, which may result in overstock for the supplier. On the other hand, since the retailer does not own inventory, the main concern of the retailer is that the acquired orders may not be fulfilled because of the supplier's shortage of stock. To cope with these challenges, we propose a menu of commitment-penalty contracts that can provide greater certainty of demand as well as greater certainty of supply. We focus our study in the asymmetric demand information case and we show that the supplier can obtain the retailer's demand information by offering a menu of commitment-penalty contracts. Under this mechanism, we find the solution that maximizes the supplier's expected profit.

Suggested Citation

  • Gan, Xianghua & Sethi, Suresh P. & Zhou, Jing, 2010. "Commitment-penalty contracts in drop-shipping supply chains with asymmetric demand information," European Journal of Operational Research, Elsevier, vol. 204(3), pages 449-462, August.
  • Handle: RePEc:eee:ejores:v:204:y:2010:i:3:p:449-462
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    References listed on IDEAS

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    4. Özalp Özer & Wei Wei, 2006. "Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information," Management Science, INFORMS, vol. 52(8), pages 1238-1257, August.
    5. Ozer, Ozalp & Uncu, Onur & Wei, Wei, 2007. "Selling to the "Newsvendor" with a forecast update: Analysis of a dual purchase contract," European Journal of Operational Research, Elsevier, vol. 182(3), pages 1150-1176, November.
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    Citations

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    Cited by:

    1. Kebing Chen & Renxing Xu & Hanwei Fang, 2016. "Information Disclosure Model Under Supply Chain Competition with Asymmetric Demand Disruption," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 33(06), pages 1-35, December.
    2. Wu, Zhengping & Crama, Pascale & Zhu, Wanshan, 2012. "The newsvendor’s optimal incentive contracts for multiple advertisers," European Journal of Operational Research, Elsevier, vol. 220(1), pages 171-181.
    3. Yu, Dennis Z. & Cheong, Taesu & Sun, Daewon, 2017. "Impact of supply chain power and drop-shipping on a manufacturer’s optimal distribution channel strategy," European Journal of Operational Research, Elsevier, vol. 259(2), pages 554-563.
    4. repec:eee:ejores:v:264:y:2018:i:1:p:239-256 is not listed on IDEAS
    5. Ma, Peng & Shang, Jennifer & Wang, Haiyan, 2017. "Enhancing corporate social responsibility: Contract design under information asymmetry," Omega, Elsevier, vol. 67(C), pages 19-30.
    6. Durango-Cohen, Elizabeth J. & Li, Chia Hang, 2017. "Modeling supplier capacity allocation decisions," International Journal of Production Economics, Elsevier, vol. 184(C), pages 256-272.
    7. Egri, Péter & Váncza, József, 2013. "A distributed coordination mechanism for supply networks with asymmetric information," European Journal of Operational Research, Elsevier, vol. 226(3), pages 452-460.
    8. Geng, Qin & Minutolo, Marcel C., 2010. "Failure fee under stochastic demand and information asymmetry," International Journal of Production Economics, Elsevier, vol. 128(1), pages 269-279, November.
    9. Heese, H. Sebastian & Kemahlıoğlu-Ziya, Eda, 2016. "Don't ask, don't tell: Sharing revenues with a dishonest retailer," European Journal of Operational Research, Elsevier, vol. 248(2), pages 580-592.
    10. Babich, Volodymyr & Li, Hantao & Ritchken, Peter & Wang, Yunzeng, 2012. "Contracting with asymmetric demand information in supply chains," European Journal of Operational Research, Elsevier, vol. 217(2), pages 333-341.

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