Optimal inventory replenishment, production, and promotion effect with risks of production disruption and stochastic demand

Abstract This paper addresses the optimization problem for inventory replenishment, production, and promotion effect with risks of production disruption and stochastic demand for a production–retail system. Based on decentralized and centralized decision models, we obtain the optimal inventory replenishment and the promotional effort of the retailer, and the optimal production quantity of the manufacturer. In order to improve the decision effect of the decentralized model, then we propose two contracts to coordinate the system, they are called advance payment contract (APC) and buyback and minimum supply quantity contract (BMC). Numerical examples are given to illustrate the theoretical analysis, and managerial insights are derived. The results show that the advantage of BMC contract over the APC contract, that is, with the BMC coordination contract the decentralized decision model can obtain more profit than centralized decision model, while the APC has the same profit with the centralized decision model. Furthermore, for any value of production disruption risk factor, the whole profit of the system under BMC mechanism is always larger than the whole profit of the system under APC mechanism in decentralized decision model.

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