Analysis of a quantity-flexibility supply contract with postponement strategy

This paper studies a supply contract between a manufacturer and a retailer in the cosmetics industry under which a retailer receives discounts for committing to purchase products before the point of differentiation. The retailer can adjust the order quantities after the trial period based on updated demand forecast information and inventory status by paying a higher per-unit cost for the incremental units or giving up the deposit. Such contracts are popular in the cosmetics industry based on fast-moving consumer goods. Given the manufacturer´s price structure, we first develop a two-period dynamic programming model to the optimal replenishment strategy for the retailer. We then further derive the quantity of the common material for the manufacturer satisfying a certain service level. Numerical results show difference in material quantities with and without using postponement strategy.