How to Coordinate Supply Chain Under O2O Business Model When Demand Deviation Happens

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1 Management Scence and Engneerng Vol. 9, o. 3, 205, pp DOI:0.3968/7392 ISS [Prnt] ISS X [Onlne] How to Coordnate Supply Chan Under O2O Busness Model When Demand Devaton Happens ZHAG Jun [a],[b] ; CHE Hong [a],* ; MA Junsheng [b] ; AG Kesheng [b] [a] School of Management and Economcs, Unversty of Electronc Scence and echnology of Chna, Chengdu, Chna. [b] Logstcs Engneerng and Management Faculty, Kunmng Metallurgy College, Kunmng, Chna. * Correspondng author. Supported by atonal atural Scence Foundaton of Chna ( ; the Doctoral Program Fund of MEPRC (Mnstry of Educaton of the People s Republc of Chna ( ; Research Fund of Kunmng Metallurgy College (4B005. Receved 9 Aprl 205; accepted 5 July 205 Publshed onlne 26 August 205 Abstract In ths paper, a supply chan consstng of one suppler and multple O2O retalers s studed. he supply chan s coordnated under the revenue-sharng contract n the statc case. Dsruptons make the prce senstvty coeffcent change after the producton plan s formulated. In centralzed supply chan, the suppler only needs to adjust the retal prce f the dsrupton s n a certan range. When the dsrupton s large enough, what the suppler needs to do s adjust the retal prce and the producton quanttes. In decentralzed decson, the supply chan cannot be coordnated. hs means that the orgnal revenue-sharng contract cannot coordnate the dsrupted supply chan. An mproved revenue-sharng contract s used to coordnate the dsrupted supply chan. he research shows that the mproved contract can coordnate the orgnal supply chan and the dsrupted supply chan, whch means that the contract has robustness when facng demand devaton. Key words: Supply chan coordnaton; O2O busness model; Sales channel; Demand devaton; Revenuesharng contract Zhang, J., Chen, H., Ma, J. S., & ang, K. S. (205. How to Coordnate Supply Chan Under O2O Busness Model When Demand Devaton Happens. Management Scence and Engneerng, 9(3, Avalable from: URL: DOI: IRODUCIO he e-commerce market grows rapdly n recent years. E-commerce market n Europe s a mature market and evolves constantly. he e n e-commerce s dsappearng. Dfferences between onlne retal and shoppng at brcks-and-mortar shops dsappear because all purchases wll be realzed by omn-channel retalng (Amanda, 203. Accordng to some statstcs, e-commerce transactons n Chna wll be $540 bllon n 205 and Chnese e-commerce market wll be larger than those of the US, Brtan, Japan, Germany, and France combned n 2020 (Snoek, 204. O2O (Onlne to Offlne/Offlne to Onlne busness model, a new knd of busness model, s put forward by some nnovatve enterprses. However, O2O busness model s not well defned n the academc world and dfferent e-commerce companes may have dfferent deas about the busness model. Many manufacturers and retalers begn to ntegrate ther supply chans by constructng ther own onlne shops and offlne experence shops. For example, Metersbonwe, a fashon manufacturer n Chna, mproves consumer s shoppng experence by constructng hs onlne and offlne shops. mall, an e-retaler subordnated to Albaba, begns to cooperate wth Ynta Department Store n 203. Many e-retalers n Chna become O2O retalers when they mprove ther customers shoppng experence and communcate wth ther customers. E-commerce companes such as aobao, mall, Jngdong Shoppng Center and Sunng Easyshoppng are O2O retalers. However, dsruptons such as natural dsasters, terrorsm attacks, major publc health events, fnancal crss, machne faults and strkes may affect busness operaton and supply chan management. An orgnallycoordnated supply chan cannot be coordnated because of some dsruptons, and the survval of the supply chan members can be nfluenced by other dsruptons. For example, a large number of arports n the Unted States Copyrght Canadan Research & Development Center of Scences and Cultures 24

2 ZHAG Jun; CHE Hong; MA Junsheng; AG Kesheng (205. Management Scence and Engneerng, 9(3, were forced to close because of 9 terrorsm attacks. Raw materal supply n many companes all over U.S.A. was delayed because of the accdent. Some supply chans are almost damaged due to ths dsrupton and t results n a heavy loss. Large companes lke Ford are also nfluenced by dsruptons. Supply of engnes and drve parts of Ford suspends for a long tme due to the slow response of ts procurement system, whch makes fve companes afflated wth Ford n orth Amerca close temporarly. Dsruptons wll make market demand change greatly. For example, the spread of foot-and-mouth dsease makes the demand for beef n Europe decrease dramatcally, whch affects the operaton of the beef supply chan n Europe. he demand for tents and movng shelters ncreases dramatcally n the dsaster areas after the Wenchuan Earthquake, 2008, and a lot of enterprses manufacturng tents have to work overtme n order to meet the demand, whch affects the operaton of ther supply chan system. Recently, wth the development of e-commerce, onlne shoppng s wdely spread all over Chna. Customers buy what they want onlne and evaluate the products after they receve them offlne. Accordng to some statstcs, total sales volume n mall s about 57 bllon RMB n th ovember, 204, whch has great mpact on the onlne and offlne supply chan system. he O2O retalers need to preorder a large number of products n order to meet the comng huge demand and the logstcs system s greatly nfluenced by logstcs actvtes such as purchasng, storng, transportng and dstrbutng. As can be seen above, supply chan members behavor, total supply chan proft and the survval of enterprses n supply chans can be affected by dsruptons. he mpact s so serous that t s necessary to study the strategy about how to coordnate supply chans when facng dsruptons and ths has been pad much attenton by many companes and academc world. A supply chan consstng of one suppler and multple O2O retalers s studed n ths paper. he rest of ths paper s organzed as follows. he related researches are revewed n Secton 2. Benchmark model s establshed n Secton 3. Secton 4 coordnates the centralzed supply chan wth demand devatons. How to coordnate the decentralzed supply chan wth demand devatons s studed n Secton 5 and an mproved revenue-sharng contract s presented n ths secton. Secton 6 concludes ths paper and some possble research opportuntes n the future are also dscussed.. LIERAURE REVIEW Present studes n O2O e-commerce model manly focus on recommendaton system and how to mprove network servce. sa (203 fnds that O2O busness model helps retalers to learn more about ther customers through present socal network data. Chen (203 shows that the servce mprovement n recommendaton system can ncrease the number of onlne consumer and consumers can buy products contanng more servce n offlne channel. Hseh (204 puts forward a BP neural network algorthms based on locaton, tme, budget and other factors, whch are used to match customer s demand under O2O busness model. Other researches related to O2O busness model come from researches n marketng. Hong (203 examnes how to promote agrcultural producton and marketng by utlzng Quanzhou Agrcultural O2O E-Commerce Platform. O2O busness model n Wanda Group, a company n Chna, s analyzed by Zhao (204. Du (204 studes how to mprove offlne servce qualty under Chnese O2O busness model. Another knd of study related to ths paper s known as dsrupton management. he concept dsrupton management s frstly put forward by Clausen (200. It s used to solve the operatons of Contnental Arlnes when t faces emergency. A two-stage supply chan wth demand dsrupton s studed by Q (2004 and Huang (2006, and quantty dscount contract s used to coordnate the supply chan. Gannoccaro (2004 studes a three-stage supply chan coordnaton by usng revenuesharng contract. Xu (2006 studes a knd of supply chan coordnaton problem when the producton cost functon s a convex functon. Xao (2005, 2008 studes a supply chan wth one-manufacturer and two-retalers when the demand dsrupton occurs and extends the study of a more complex problem n whch there exsts competton between the two retalers. Le (202 examnes how to coordnate a two-stage supply chan under asymmetrc nformaton wth a lnear contract when demand and cost dsruptons happen. Compared wth prevous studes, there are some dfferences n ths paper. Frstly, t analyzes a supply chan under O2O busness model, a new knd of supply chan. Secondly, the dscusson n ths paper s dfferent from Q (2004 and Huang (2006. We analyze the mpact of the prce senstvty coeffcent on a more complex supply chan. hrdly, ths paper examnes the role of the revenue-sharng contract to supply chan coordnaton. 2. BECHMARK MODEL hs paper studes a supply chan consstng of one suppler (she and multple O2O retalers, n whch the suppler s the prce leader and the O2O retalers are the prce followers. he transacton between the suppler and the retalers s done under symmetrc nformaton. It means that the suppler knows each retaler s cost structure and proft functon, and vce versa. he suppler sells a knd of short-lfe-cycle product to each retaler accordng to the producton plan whch s based on market forecast. Each retaler sells the product onlne and customers receve the product offlne. he retalers decde whether 25 Copyrght Canadan Research & Development Center of Scences and Cultures

3 How to Coordnate Supply Chan Under O2O Busness Model When Demand Devaton Happens or not to buy the product accordng to the revenue-sharng contract wth the suppler offers. Suppose that p s the retal prce and the demand functon that the -th O2O retaler faces s an exponental functon,.e., d D e -k p (, 2,...,. D s the market scale n the -th market and c s the suppler s unt producton cost. Each retaler s unt cost of usng hs e-commerce platform and hs unt dstrbuton cost are zero. p s the unt retal prce n the -th market and k (k >0 s the prce senstvty coeffcent n the -th market. Q s the real demand at the retal prce p. hen, the demand functon s Q D e -k p and the retal prce s D ln p k Q. he number of O2O retalers s. he total proft of the supply chan system s D f Q ( ln c. ( k Q From the frst-order condton, we obtan that the optmal retal prce n each market s p c, (2 k the optmal producton quantty n each market s Q D exp{-(ck }, (3 and the optmal supply chan proft s f max ( ck De k. (4 Lemma. If f s (Q(-φ f max wth 0<φ< or f r (Q(- φ f max wth 0<φ<, the supply chan system composed of one suppler and O2O retalers can be coordnated under the revenue-sharng contract, where f s (Q s the optmal total proft of the suppler and f r (Q s the optmal total proft of the O2O retalers. PROOF. When Wφ c (0<φ<, the suppler s proft functon under the revenue-sharng contract (W, φ s shown below, where f s (Q s the proft from the -th O2O retaler and f r (Q s the -th O2O retaler s proft. (-φ f ( Q f ( Q ( φ p Q ( W c Q s s (p -cq (-φf max. he correspondng O2O retalers proft functon s also obtaned. f ( Q f ( Q p Q W Q ( p c Q f r r φ φ φ max. Hence, the revenue-sharng contract (W, φ can coordnate the supply chan (Cachon, DECISIO-MAKIG I CERALIZED O2O SUPPLY CHAI WIH DEMAD DEVIAIOS Some dsruptons happen n the O2O supply chan after the suppler s producton plan s formulated. It makes the prce senstvty coeffcent change. he devatons are captured by the terms of Δk f and only f k Δk >0, whch ensure t has real meanng. Hence, the dscussons followed are based on the condtons mentoned above. After the devatons occur, the demand functon s d D e -(k Δk p. he correspondng market scale s Q D e - (k Δk p and the retal prce s D p ln. o smplfy k k Q the dscussons followed, we put forward the followng assumptons. b and b 2 are the margnal costs related to the change of the market scale and (x max{0,x}. b (b >0 s the extra ncreased unt cost n each market due to ncreasng producton plan and b 2 (b 2 >0 s the extra unt dsposal cost n each market due to sellng the remaned products n secondary market at the prce lower than the suppler s margnal producton cost when the supply s greater than the demand. he mpact of the devaton on each market every O2O retaler faces s consstent, whch means that each market reacts consstently to the devaton. hat s to say, f dsrupton makes any market scale ncrease, then every market scale and the total market scale ncrease. If dsrupton makes any market scale decrease, then every market scale and the total market scale decrease. hus, the correspondng total supply chan proft functon s wrtten as D f ( Q Q ( ln c b ( Q Q b ( Q Q k k Q 2. (5 In order to further examne the mpact of the devatons mentoned above on the orgnal producton plan, we put forward Lemma 2 below. Lemma 2. If the devaton of the prce senstvty coeffcent occurs, we assume that Q * s the optmal producton quantty whch maxmzes the supply chan proft functon shown n Equaton (5. he followng results hold: f -k <Δk <0,Q * Q ; f Δk >0, Q * Q. Accordng to Lemma 2, f Δk <0, then Q * Q. hus, optmzng the total supply chan proft functon f (Q s equal to optmze the strctly concave functon D f ( Q Q ( ln c b ( Q Q k k Q, (6 subject to Q * Q. If Δk >0, then Q * Q. hus, optmzng the total supply chan proft functon f (Q s equal to optmze the strctly concave functon D f ( Q Q ( ln c b ( Q Q 2 2 k k Q, (7 subject to Q * Q. By usng the methodology smlar to Q (2004 and Huang (2006, heorem s obtaned whch shows the optmal decsons n the centralzed O2O supply chan when the demand devaton happens. Copyrght Canadan Research & Development Center of Scences and Cultures 26

4 ZHAG Jun; CHE Hong; MA Junsheng; AG Kesheng (205. Management Scence and Engneerng, 9(3, heorem. When dsruptons make the prce senstvty coeffcent change (the devaton of the parameters s Δk and the demand functon s d D e -(k Δk p n each market, the suppler, the decson-maker n the centralzed O2O supply chan, needs to adjust the optmal retal prce and the optmal producton quanttes n order to optmze the total supply chan proft and realze supply chan coordnaton. Accordng to dfferent devatons, the optmal retal prce p * and the optmal producton quantty Q * are shown as follows: p k p b, k ( k k k ( ck p, k ( k k k p b2, k ( k k ck f k < k k c b ck f k < k < k c b c b2 ck f k k. c b ck D exp{ [ ( c b ( k k ]}, f k < k k c b ck ck Q D exp{ ( ck }, f k < k < k c b c b2 ck D exp{ [ ( c b2 ( k k ]}, f k k. c b2 (9 heorem llustrates the followng results. When dsruptons make the prce senstvty coeffcent n each market change, there exsts robustness n the orgnal producton plan. When Δk s n a certan range, the orgnal producton plan n each market does not need to be changed but the retal prce n each market needs to be adjusted n order to compensate for the extra cost derved from the dsruptons. he retal prce n each market s only nfluenced by the prce senstvty coeffcent n each market. If Δk exceeds a certan range, the orgnal producton plan n each market needs to be adjusted and the retal prce n each market also needs to be adjusted accordng to the change of the market scale. It s also 2 ck ; (8 shown that the orgnal revenue-sharng contract cannot coordnate the supply chan when devatons happen and we need to adjust the contract n order to coordnate the supply chan. 4. COORDIAIG DECERALIZED O2O SUPPLY CHAI WIH DEMAD DEVIAIOS In the centralzed decson, when dsruptons make the prce senstvty coeffcent n each market change, the optmal strategy for -th O2O retaler s to choose the retal prce p * and the procurement quantty Q *. In decentralzed decson, f the supply chan members sgn an approprate contract whch makes each O2O retaler choose p and Q *, then the decentralzed supply chan obtans the optmal supply capacty whch equals to the optmal supply capacty n the centralzed O2O supply chan system. hs means that the supply chan s coordnated n decentralzed decson. he revenue-sharng contract s used to coordnate the decentralzed supply chan system. Let S(Q b (Q -Q b 2 (Q -Q. For a gven revenue allocaton rato φ (0<φ <, the suppler offers retaler (,2,, an mproved revenue-sharng contract n whch the retal prce for each retaler s S( Q W ( Q φ( c. Q heorem 2. In the decentralzed O2O supply chan, f the dsruptons make the prce senstvty coeffcent n each market change, the supply chan can be coordnated by the revenue-sharng contract (W(Q, φ and the optmal total supply chan proft can be allocated n any gven rato between the suppler and the O2O retalers. PROOF. For a gven revenue allocaton rato φ(0<φ<, the suppler s total proft functon under the revenue-sharng contract (W(Q, φ s shown below. f Q f Q Q D W Q Q cq b Q Q b Q Q s ( s ( ( φ ln ( ( 2( k k Q D S( Q ( φ Q ln φ( c Q cq b ( Q Q b2 ( Q Q k k Q Q D ( φ Q ln ( φ cq ( φ S( Q k k Q D ( φ Q ln cq S( Q ( φ f ( Q k k Q We obtan the total proft functon for those O2O retalers by usng the smlar method mentoned above. D fr ( Q fr ( Q φ Q ln W ( Q Q k k Q D S( Q φ Q ln φ( c Q k k Q Q D φ Q ln cq S( Q φ f ( Q k k Q 27 Copyrght Canadan Research & Development Center of Scences and Cultures

5 How to Coordnate Supply Chan Under O2O Busness Model When Demand Devaton Happens hus, the supply chan s coordnated and the optmal channel proft can be allocated between the supply chan members n any gven allocaton rato by adjustng the parameter φ. hs means that the mproved revenuesharng contract (W(Q,φ can coordnate the decentralzed O2O supply chan. Besdes, f Δk 0, then b b 2 0. he supply chan proft functon n ths scenaro equals to f (Q and the wholesale prce s Wφ c, whch means that the mproved revenue-sharng contract (W(Q,φ can coordnate the supply chan when the devatons do not occur. In other words, there exsts ant-dsrupton ablty n the mproved contract. COCLUSIO hs paper studes how to coordnate one-suppler-multple- O2O-retaler supply chan n centralzed and decentralzed decsons when some dsruptons make the prce senstvty coeffcent change. In centralzed decson, the supply needs to ncrease the producton quanttes n order to meet the enlarged market demand when the dsruptons make the market demand ncrease. In decentralzed decson, the suppler needs to decrease the producton quanttes n order to meet the reduced market demand when the dsruptons make the market demand decrease. here exsts robustness n the orgnal producton plan when makng decentralzed decson. In another words, when the devatons of the prce senstvty coeffcent satsfy a gven condton, the orgnal producton plan does not need to be adjusted and the suppler only needs to adjust the retal prce n order to compensate for the devaton cost orgnated from the dsruptons. he producton plan and the retal prce need to be adjusted f the devatons of the prce senstvty coeffcent exceed some crtcal value. An mproved revenue-sharng contract s used to coordnate the decentralzed supply chan, whch can maxmze the total supply chan proft. It s noted that the results derved n ths paper also llustrate the generalty of the revenuesharng contract. here are abundant opportuntes n the future. For example, t s nterestng to study more complex supply chan when the nformaton of proft and cost between the partcpants s asymmetrc. It s worth coordnatng the same supply chan system when the demand dsrupton and the suppler s producton cost dsrupton occur smultaneously another drecton s to study the problem whch the demand functon the retaler face s a nonlnear and more complex functon. More complex supply chan structure wth other devatons s also worth studyng. REFERECES Amanda. (203, March 3. Chna e-commerce market to reach 30 trllon yuan n Chna Internet Watch. Cachon, G. P., & Larvere, M. A. (2005. Supply chan coordnaton wth revenue sharng contracts: strengths and lmtatons. Management Scence, 5(, Chen, Y. C., & Hseh, H. C., et al. (203. Improved precson recommendaton scheme by BP algorthm n O2O commerce. 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