An Integrated Contract Strategy in a Three-Echelon Supply Chain with Capacity Limitation under the Forecast Update

In this paper, a model with one supplier, one manufacturer and one retailer is constructed to analyze the situation that a retailer makes orders twice before and after the forecast update from the supply chain coordination perspective. The manufacturerpsilas capacity is insufficient according to the second order of the retailer, so the manufacturer may recover the deficit by capacity outsourcing from the supplier at a certain option price at first and then supplying the very product back to the retailer by exercising the options. There are two decision points in this model. At the beginning of the planning horizon, the retailer decide how much to order for the first time, and the manufacturer knows her limited capacity and decides to purchase options from the supplier to assure the retailerpsilas demand to be completely satisfied. At the second decision point, with forecast update, the retailer makes his second order, and the manufacturer exercises the options to meet the retailerpsilas order. A numerical example is presented to illustrate the efficacy of the developed model in the end.