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

Konstantin Kogan

European Journal of Operational Research, 2012, vol. 218, issue 1, 113-123

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.

Keywords: Supply chain management; Gaming; Uncertainty modeling; Inventory (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:218:y:2012:i:1:p:113-123

DOI: 10.1016/j.ejor.2011.10.022

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