Capacity planning and allocation with multi-channel distribution

In this paper, we study a multi-channel distribution system in which a manufacturer sells its product via an independent service provider and a direct selling market simultaneously. The manufacturer allocates its production capacity to the service provider, and then the service provider supplements some value-added services to the product to satisfy the demand of the downstream customers. We assume that the manufacturer's production capacity planning and allocation decisions are challenged by information asymmetry with the service provider and consider a two-stage model: at the first stage, the manufacturer determines the optimal production capacity based on the service provider's order reservation and the demand forecast in the direct selling market. At the second stage, the manufacturer allocates the production capacity, taking into account updated demand from the service provider and the direct selling market. In the paper, we propose several decision-making models and identify some structural properties for them. In addition, policies for production capacity allocation between the service provider and the direct selling market are developed with various different market scenarios. The numerical experiment results show that introducing direct selling market can significantly improve the system performance and the decision-making mechanism developed in the paper is feasible and effective for the system.