Ordering policy and coordination of a supply chain with two-period demand uncertainty

We develop a two-period game model of a one-manufacturer and one-retailer supply chain to investigate the optimal decisions of the players, where stock-out and holding costs are incorporated into the model. The demand at each period is stochastic and price sharply drops in mid-life. We assume the retailer has a single order opportunity, and decides how much inventory to keep in the middle of selling season. We show that both the price-protection mid-life and end-of-life returns (PME) scheme and the only mid-life and end-of-life returns (ME) scheme may achieve channel coordination and access a ‘win–win’ situation under some conditions. The larger the lowest expected profit of the retailer, the lower the possibility of ‘win–win’ situation will be. Combined with the analysis of feasible regions for coordination policies, we find that PME scheme is not always better than ME scheme from the perspective of implementable mechanism. Finally, we find that adopting the dispose-down-to (DDT) policy can bring a larger improvement of the expected channel profit in the centralized setting, and it is interesting that by using DDT policy, double marginalization occurs only at Period 1, and however, does not plague the retailer in Period 2.

► We develop a two-period single-ordering-opportunity model of supply chain with considering stock-out and holding costs. ► Scheme PME or ME may achieve channel coordination and access a win–win situation under some conditions. ► PME is not always better than ME from the perspective of implementable mechanism. ► Adopting DDT policy can bring a larger improvement of channel profit. ► Double marginalization occurs only at Period 1 by using DDT policy.