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


  • Kogan, Konstantin


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.

Suggested Citation

  • Kogan, Konstantin, 2012. "Ship-to-order supplies: Contract breachability and the impact of a manufacturer-owned direct channel," European Journal of Operational Research, Elsevier, vol. 218(1), pages 113-123.
  • Handle: RePEc:eee:ejores:v:218:y:2012:i:1:p:113-123
    DOI: 10.1016/j.ejor.2011.10.022

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    References listed on IDEAS

    1. Chang,Fwu-Ranq, 2009. "Stochastic Optimization in Continuous Time," Cambridge Books, Cambridge University Press, number 9780521541947, March.
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    7. Yossi Aviv, 2007. "On the Benefits of Collaborative Forecasting Partnerships Between Retailers and Manufacturers," Management Science, INFORMS, vol. 53(5), pages 777-794, May.
    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. 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.
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