A co-ordinated planning model with demand uncertainty

This paper develops a coordinated planning model for production and order planning for single-manufacturer and single-retailers, and single-manufacturer and two-retailers. The application is for products with short lifecycles, such as fashion goods. The demand is assumed to be random with a normal distribution, and is linearly correlated in the case of two retailers. The coordinated policy is compared with a ‘returns’ policy model where the manufacturer buys back all the unsold items at a pre-specified price. Order quantities and profits for manufacturer and retailer are derived for base model, returns policy model, and for coordinated planning model, all cast as a newsvendor problem. Results show that the expected total profits are higher for coordinated model than for other models. A compensation or profit sharing scheme is then suggested based on returns policy and it is shown that the coordinated model with such sharing yields a ‘win–win’ situation for both suppliers and retailers. Numerical results are presented to illustrate the profit patterns under various conditions. The model shows that coordination of such planning in supply chains has considerable economic benefits.