A Quantity-Flexibility Contract in Two-Stage Decision with Supply Chain Coordination

We study a quantity-flexibility supply contract between a manufacturer and a retailer in two periods. The retailer can get a low wholesale price within a fixed quantity and adjust the quantity at the end of the first period. The retailer can adjust the order quantities after the first period based on updated inventory status by paying a higher per-unit price for the incremental units or obtaining a buyback price per-unit for the returning units. By developing a two-period dynamic programming model in this paper, we first obtain an optimal replenishment strategy for the retailer when the manufacturer's price scheme is known. Then we derive an proper pricing scheme for the manufacturer by assuming that the supply chain is coordinated. The numerical results show some managerial insights by comparing this coordination scheme with Stackelberg game.