A mutually beneficial coordination mechanism for a one-supplier multi-retailers supply chain

Abstract

In this study, we investigate devising a mutually beneficial coordination mechanism for a supply chain system consisting of a single supplier and a group of heterogeneous retailers. We employ the assumptions in the basic EOQ model, namely, deterministic demand, no shortages, and deterministic lead-time in our study. We also assume that the supplier has complete knowledge of the relevant cost parameters of the retailers. The supplier's (finite) production capacity is sufficient to meet the retailer's demand. All of the retailers follow an integer-ratio policy, i.e., each retailer purchases at an integer or reciprocal of an integer multiple of the supplier's setup interval. We assume that the maximum cost a retailer is prepared to incur cannot exceed its budget constraint when adopting the supplier's production setup interval. In this mutually beneficial coordination mechanism, the supplier offers a price discount to compensate the cost increase a retailer encounters from adopting the supplier's production setup interval. Therefore, our price–discount strategy encourages the retailers to coordinate their replenishment orders to accommodate the supplier's cost saving policies. Also, we propose a savings–sharing policy that asks the supplier to share part of its saving as retailers are willing to implement the designated replenishment schedule. Numerical experiments show that our mutually beneficial coordination mechanism could efficiently generate further cost savings for both the supplier and the retailers in the supply chain. The results also indicate that the cost savings for the supplier may not be sufficient to compensate the cost increase for the retailers when the major setup cost is below a threshold value.