Optimal ordering policy in a two-stage supply chain with advance payment for stable supply capacity

We propose a two-stage optimization model to characterize a retailer’s ordering policy in a supply chain with demand and supply uncertainties sequentially realized, where the advance payment could be conducted before the selling season to stable the supplier’s capacity. Based on the model, we investigate the optimal condition of the retailer’s ordering policies, and prove the existence and uniqueness of the optimal solution for the advance payment. We also investigate the supplier’s pricing strategy for the retailer’s advance payment. Finally, a set of numerical tests are carried out to illustrate the results. The results show that in the retailer’s optimal decision, the advance payment is increased along with the supply risk and is significantly influenced by the retailing price and the supply rate; the results also give the structure of the supplier’s the optimal pricing strategy for the retailer’s advance payment.