Supply chain coordination with manufacturer's limited reserve capacity: An extended newsboy problem

This paper develops an extended newsboy model and presents a coordination decision policy in a supply chain consisting of one manufacturer and one retailer. In order to meet a random demand, the retailer can place a second order at the end of the period if a stock-out occurs. The manufacturer's reserve capacity for the retailer's second order is limited to M units. To maximize each individual's expected profit, the retailer decides his optimal order quantity and the manufacturer decides his optimal reserve capacity. A coordination mechanism is designed which can make the supply chain increase profit. A price discount policy is developed to allocate the expected increased profits between two sides of the supply chain.