Coordination Tactic of Downstream Capacity Expansion in Supply Chain

We model a supply chain consisting of a supplier and a retailer, where the mean demand rate has relation to the guaranteed delivery time offered by the retailer to the customers and the market price, where the price itself is determined by the length of the delivery time. A mathematical framework is proposed to understand the interrelations among delivery time guarantee, pricing and order processing capacity of the retailer. The model and numeral analysis illustrate that the demand is higher and the retailer needs larger order processing capacity in the integrated decision than in the decentralized decision. We then show that the supplier can encourage the retailer to expand the capacity and to maximize the profits of whole supply chain by sharing in incremental profit to the retailer.