Supply chain coordination with demand disruptions

The purpose of this paper is to investigate a one-supplier–one-retailer supply chain that experiences a disruption in demand during the planning horizon. While demand uncertainty has long been a central research issue in supply chain management, little attention has been given to disruptions once the production plan has been made. In this paper, we show that changes to the original plan induced by a disruption may impose considerable deviation costs throughout the system. One of our general goals is to analyze these costs. When the production plan and the supply chain coordination scheme are designed in a static manner, as is most often the case, both will have to be adjusted under a disruption scenario. Using wholesale quantity discount policies, we derive conditions under which the supply chain can be coordinated so that the maximum potential profit is realized. Our results are applicable for both centralized and decentralized decision-making.