Buy-back Policy for Supply Chain Coordination: A Simple Rule

Abstract

In this paper, a simple and novel procedure is proposed to determine a set of buy-back prices and the wholesale costs to maximise the profit of a two-stage supply chain consisting of one supplier and one retailer. A supplier (or manufacturer) can implement a buy-back policy to influence the quantity ordered by its retailer. We have developed a simple rule to achieve channel coordination in a two-stage supply chain dealing with a limited life product. A numerical experiment has been conducted to illustrate the proposed model. Sensitivity analyses are performed to show the impact of various parameters on supply chain profit. The results depict that a higher degree of channel coordination not only increases the expected supply chain profit but also decreases the impact of demand uncertainty on expected profit. Moreover, the sensitivity results show that the increase in the degree of channel coordination decreases the coefficient of variation in retailer's profit. Finally, the implications of using these results for the managers have been discussed.