Impacts of buyers order batching on the suppliers demand correlation and capacity utilization in a branching supply chain

Abstract

There are several ways for a manufacturer to cope with demand uncertainty, e.g. inventories, capacity and cash. Among these, this study focuses on the second one, the capacity, especially on the problem of investing in flexible facilities and enhancing their utilization via demand management. In a supply chain? demands that an upstream firm (supplier) faces are the purchase orders from the downstream members (buyers). We analyse the impacts of buyers' order batching on the supplier's demand correlation and capacity utilization in a simple branching supply chain, where a supplier does business with two buyers those market demands are correlated. Our results show that: ii a supplier who faces a smaller demand correlation coefficient (i.e. closer to -1) would invest more in flexible facilities; (ii) an increase in order lot size mitigates the correlation of purchase orders; and (iii) a supplier whose facilities are flexible would prefer frequent orders with smaller lots only when market demands are highly negatively correlated. This means that even suppliers whose facilities are flexible would rather prefer infrequent orders with larger lots in the presence of positively correlated demands. Additionally, some managerial implications are discussed.