Robust ordering, production, and replenishment in a supply chain for innovative products: A two-echelon newsvendor problem with partial information in yield and demand

Abstract

With partial yield and demand information, we investigate a two-echelon newsvendor problem in a supply chain for innovative product, in which the retailer and the supplier make sequential decisions in ordering, production, and replenishment, respectively. We adopt the minimax-regret criterion to assume the risk-averse nature and deduce the minimax-regret inventory decisions. We explore replenishment (emergency) production strategies for the supplier. Then we propose shortage penalty strategies as well as subsidized replenishment strategies for the retailer so that the supplier can maintain the required supply even under higher replenishment production costs. We further reveal the role of information uncertainty in the minimax-regret decisions and the bullwhip effect. Interestingly, the results show that the penalty strategies do not always lead to less regret for the retailer, and the information uncertainty does not necessarily lead to greater regret for the supplier. Moreover, some schemes to reduce the bullwhip effect are proposed, such as improving the accuracy of uncertain yield, increasing shortage penalty or replenishment subsidy, and decreasing replenishment cost. It is verified that the replenishment strategies can increase profits for both the retailer and the supplier under some conditions. In extensions, we reveal the supplier’s preference for emergency production and external procurement, as well as preferences for information sharing and confidentiality. Meanwhile, we find that decentralized decision-making may even outperform centralized decision-making in some situations when the minimax-regret criterion is adopted to deal with the information deficiency. Finally, the robustness of the replenishment strategies in reducing both enterprises’ regrets is checked.