Supply chain coordination with two production modes and random demand depending on advertising expenditure and selling price

This article discusses production and order as well as advertising coordination issues in a single-manufacturer single-buyer supply chain, where the manufacturer sells a newsvendor-type product through the buyer who faces a random demand depending on advertising expenditure and selling price. The buyer has two ordering opportunities: the one happens before the beginning of the season, and the other takes place at the end of the season. The ordered items are produced by the manufacturer in two production modes for different requirements. The first production mode is relatively cheap but requires a long lead-time, whereas the second is expensive but offers quick response. Under such a setting, the centralised and decentralised decision models are developed, respectively, and the closed form solution to each model is provided as well. Moreover, we point out that the traditional revenue-sharing contract fails to coordinate the supply chain. We thus propose an improved revenue-sharing contract that requests the manufacturer not only shares the buyer's revenue but also bears a portion of the buyer's operating costs. Such a contract can achieve perfect coordination of the supply chain and arbitrarily allocate its profit between two parties.