Order Quantity Allocation with Price-Sensitive Demand and a Controllable Production Rate

Abstract We consider the impact of a controllable production rate (Kim & Glock, 2018) on the profitability of a two-stage supply chain model consisting of a single buyer and multiple suppliers producing a single product that is coordinated by a profit-sharing mechanism (Ventura et al., 2021). The controllable production rate added flexibility for the supply chain to meet demand. We assumed the suppliers’ production rates can vary continuously within a given range, and demand at the buyer stage is sensitive to retail prices. A mixed-integer nonlinear programming formulation was used to solve the problem. A numerical example, including a one-way sensitivity analysis on the cost parameters, is presented and analyzed to illustrate the impact of a controllable production rate on a two-stage supply chain model. We found that a controllable production rate provided greater flexibility in terms of supplier selection and the potential to meet higher demand. However, as the production rate increased, the supplier production cost also increased. Thus, overall profit and supplier selection behavior was closely tied to the production cost parameter. 

Advisor: Paul Griffin Professor