Capacitated Supply Chain with Demand Uncertainty

Abstract

Abstract We consider a manufacturer-retailer supply chain which faces a high demand uncertainty. To mitigate the overage and underage costs caused by the high demand uncertainty, an emergency order is provided by the manufacturer to the retailer. However, due to the limited capacity, the manufacturer would impose a maximum supply commitment on the emergency order. The manufacturer needs to make more initial production or reserve capacity in advance for the supply commitment for the retailer’s emergency order. We find that when the emergency order opportunity is provided, the manufacturer may be worse off although the retailer would be not.