Optimal production decision and supply chain coordination under different capital conditions

Abstract

This paper investigates a two-level supply chain composed of a retailer and a manufacturer with budget-constrained. The manufacturer’s optimal production quantity is explored under different own capital conditions, and the gap between in the decentralized system with wholesale price contract and in the centralized system is discussed. Then, an option contract is used to investigate the supply chain coordination issue. The results show that, when the manufacturer has enough capital, both the production quantity and the expected profit in the decentralized system with wholesale price contract are less than that in the centralized system, and the gap between in the decentralized system and in the centralized system is increasing on the own capital. The option contract can coordinate the supply chain with budget-constrained, and in the presence of supply chain coordination, both the manufacturer and the retailer can become better off by setting reasonable option contracts. Several numerical examples are provided to demonstrate these finds.