Pricing and production decisions in dual‐channel supply chains with demand disruptions

This paper develops a two‐period pricing and production decision model in a one‐ manufacturer‐one‐retailer dual‐channel supply chain that experiences a disruption in demand during the planning horizon. While disruption management has long been a key research issue in supply chain management, little attention has been given to disruption management in a dual‐channel supply chain once the original production plan has been made. Generally, changes to the original production plan induced by a disruption may impose considerable deviation costs throughout the supply chain system. In this paper, we examine how to adjust the prices and the production plan so that the potential maximal profit is obtained under a disruption scenario. We first study the scenario where the manufacturer and the retailer are vertically integrated with demand disruptions. Then we further assume that the manufacturer bears the deviation costs and obtain the manufacturer’s and the retailer’s individual optimal pricing decision, as well as the manufacturer’s optimal production quantity in a decentralized decision‐making setting. We derive conditions under which the maximum profit can be achieved. The results indicate that the optimal production quantity has some robustness under a demand disruption, in both centralized and decentralized dual‐channel supply chains. We also find that the optimal pricing decisions are affected by customers’ preference for the direct channel and the market scale change, in both centralized and decentralized dual‐channel supply chains.