Order quantity flexibility as a form of customer service in a supply chain contract model

This paper analyzes the Quantity-Flexibility (QF) contract, under which the buyer provides to the supplier information about expected future orders for the predetermined horizon and the supplier, in return, provides the buyer with the flexibility to adjust future orders later. Under this scheme, the flexibility profile of the contract can be perceived by the buyer as a form of customer service, by which the supplier commits to fulfil the buyer??s maximum likely order at the cost of the supplier??s inventory risk. The simulation results show that the benefit of the contract to either party clearly depends on the flexibility profile of the contract. For the supplier, there exists a trade-off between customer service level and inventory risk associated with the flexibility profile. However, for the buyer, the flexibility demonstrates a principle of diminishing returns, which is contrary to the general notion that buyers always prefer more order quantity flexibility. In fact, greater flexibility does not always translate into better customer service to buyers.