Supply-chain coordination under an inventory-level-dependent demand rate

School of Business Administration, South China University of Technology, Guangzhou, Guangdong 510640, People's Republic of China; Department of Mathematics and Physics, Anhui Institute of Architecture and Industry, Hefei, Anhui 230022, People's Republic of China; Department of Decision Science and MIS, Concordia University, Montreal, Quebec, Canada H3G1M8
International Journal of Production Economics (Impact Factor: 2.08). 01/2008; DOI: 10.1016/j.ijpe.2007.10.024

ABSTRACT In this paper, we consider coordination issues of a distribution system composed of a manufacturer and a retailer. The manufacturer offers a single product to the retailer and the demand for the product at the retailer's end is stock dependent. We focus on three aspects of the resulting supply chain. First, we discuss the manufacturer-Stackelberg game structure to determine how the manufacturer sets the wholesale price of the product and how the retailer in turn determines the order quantity. We assume that both the parties share relevant cost information. Then we develop a simple profit-sharing mechanism that would ultimately achieve perfect channel coordination. Finally, the manufacturer is provided with a quantity discount scheme to induce the retailer to increase the order quantity so as to maximize the manufacturer's profit. We show that this discount scheme also achieves the perfect coordination of the whole channel. Numerical examples are used to illustrate the models.

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