Price discount based on early order commitment in a single manufacturer–multiple retailer supply chain

Early order commitment (EOC) is a strategy for supply chain coordination, wherein the retailer commits to purchasing from a manufacturer a fixed order quantity a few periods in advance of the regular delivery lead time. In this paper, we formulate and analyze the EOC strategy for a decentralized, two-level supply chain consisting of a single manufacturer and multiple retailers, who face external demands that follow an autocorrelated AR(1) process over time. We characterize the special structure of the optimal solutions for the retailers’ EOC periods to minimize the total supply chain cost and discuss the impact of demand parameters and cost parameters. We then develop and compare three solution approaches to solving the optimal solution. Using this optimal cost as the benchmark, we investigate the effectiveness of using the wholesale price-discount scheme for the manufacturer to coordinate this decentralized system. We give numerical examples to show the benefits of EOC to the whole supply chain, examine the efficiency of the discount scheme in general situation, and provide the special conditions when the full coordination is achieved.