Input Quantity Decision and Coordination Mechanism with Two Production Chances and Yield Uncertainty

Abstract

Conducting a second production run can improve the company’s capability of meeting the market demand. Few works examine optimal input quantity decisions under the mode with two production chances considering demand and yield uncertainty. We propose a vendor-managed inventory (VMI) supply chain with one supplier and one retailer. The supplier has two production chances and faces yield uncertainty in each production run. It is necessary for the supplier to make trade-offs between the cost and benefit of the second production run, then decide whether to conduct the second production run. We investigate the supplier’s optimal input quantity decision in each production run and obtain the supply chain members’ expected profits. As a comparison, the mode with one production chance is also developed. We find that two production chances can help improve the performance of the supply chain under yield uncertainty. A revenue-sharing contract is introduced to coordinate the supply chain with two production chances, and efficient profit allocation is achieved through adjusting the revenue-sharing ratio and the wholesale price. An extension is conducted for a sensitivity analysis of unit punishment cost on the supplier’s input quantity decisions.