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A Stochastic Inventory Model With Fast‐Ship Commitments
Author(s) -
Chen HaoWei,
Gupta Diwakar,
Gurnani Haresh,
Janakiraman Ganesh
Publication year - 2016
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/poms.12499
Subject(s) - supply chain , stockout , postponement , business , profit (economics) , newsvendor model , operations research , industrial organization , microeconomics , operations management , computer science , economics , marketing , engineering
We present a multiperiod model of a retail supply chain, consisting of a single supplier and a single retailer, in which regular replenishment occurs periodically but players have the option to support fast delivery when customers experience a stockout during a replenishment period. Because expedited shipments increase the supplier's transportation cost, and possibly production/inventory costs, the supplier typically charges a markup over and above the prevailing wholesale price for fast‐shipped items. When fast shipping is not supported, items are backordered if customers are willing to wait until the start of the next replenishment period. We characterize the retailers and the supplier's optimal stocking and production policies and then utilize our analytical framework to study how the two players respond to changes in supply chain parameters. We identify a sufficient condition such that the centralized supply chain is better off with the fast‐ship option. We find a range of markups for fast‐ship orders such that the fast‐ship option is preferred by both the supplier and the retailer in a decentralized chain. However, a markup that is a win–win for both players may not exist even when offering fast‐ship option is better for the centralized chain. Our analysis also shows that depending on how the markup is determined, greater customer participation in fast‐ship orders does not necessarily imply more profits for the two players. For some predetermined markups, the retailer's profit with the fast‐ship option is higher when more customers are willing to wait. However, the retailer may not be able to benefit from the fast‐ship option because the supplier may choose not to support the fast‐ship option when fast‐ship participation increases due to the fact that the fast‐ship participation rate adversely affects the initial order size.