Impact of information on newsvendor ordering and incentive contract for retailer in a two-level supply chain

Asif Muzaffar and Shiming Deng

International Journal of Services and Operations Management, 2014, vol. 17, issue 4, 385-403

Abstract: This paper addresses two problems: 1) comparison of newsvendor's ordering policies for high margin fashion products with and without demand knowledge under his risk profile. Generally, a buyer is considered conservative when he has an estimate about demand mean and variance and he orders aggressively when he has demand knowledge. We compare these ordering policies under buyer risk profile for high margin products. For highly perishable and trendsetters lack of information is not detrimental. Newsvendor of such product can forego demand information because fast changing trend may not allow him to gather reliable demand forecast. 2) Our second model encompasses an incentive contract based on two incentive schemes for fashion items that is essentially design-win and specifically supply chain coordinated as well. For highly trendy products, manufacturer reserves more capacity at the time of negotiation or retailer orders less because of risk profile. Manufacturer offers buyer/retailer incentive to order more before demand is actually realised. Manufacturer can find a wholesale price that divides supply chain profits proportionally. For a game theoretic environment, we examine contract numerically and find that contract efficiency depends on wholesale price and demand variability.

Keywords: worst case distribution; WCD; risk bias; incentive contracts; newsvendor ordering; retailers; two-level supply chain; supply chain management; SCM; ordering policies; high margin products; fashion products; buyer risk; demand forecasting; game theory; wholesale price; demand variability. (search for similar items in EconPapers)
Date: 2014
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