Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
476896 | European Journal of Operational Research | 2012 | 11 Pages |
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.
► We consider a supply chain operating under ship-to-order contract terms. ► Stochastic calculus framework is employed to study the problem. ► We derive a condition when the retailer can naively assume that she will get a desired fill rate from the manufacturer. ► We elaborate upon the effect of uncertainty induced by outlet sales.