Retailer risk absorbed

In all the examples discussed until this point, the manufacturer chose capacity and thus absorbed supply chain risk. Consider the case where the retailer has to order ahead of observing demand (i.e., at time L before the start of the season), while the manufacturer produces this certain order. The retailer thus absorbs all demand risk through its choice of inventory. Given that demand is variable, this demand risk manifests itself at the end of the season through either excess inventory that has to be salvaged or shortages that generate opportunity costs. 

Table 5.10 Retailer expected profit calculations for wholesale price agreement when the retailer absorbs risk r = 4, w = 2, c/, = 0.5, c = 0.6, K = 15, optimal service level = 0.5...

How does the problem change from the discussions in earlier sections where the manufacturer absorbs all risk Notice that all of the contracts we discussed earlier can now be considered for this case. As before, double marginalization will prevent the supply chain from being coordinated with a wholesale price only contract. A payback contract now becomes a returns contract, where the manufacturer takes back leftover product from the retailer with an associated payment for returns. The payback contract can coordinate the supply chain in this case. The capacity reservation contract also coordinates the supply chain in this case due to its equivalence to the returns contract, as discussed earlier. 

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