Contract design for two-stage supply chain coordination: Integrating manufacturer-quality and retailer-marketing efforts

Abstract

This paper investigates the issue of channel coordination for a two-stage supply chain with one retailer and one manufacturer. The demand is influenced by the retailer's sales effort and manufacturer's quality improvement efforts. We found that using the traditional two-part tariff contract alone cannot coordinate the supply chain well. Joining the two-part tariff contract with the quality effort cost sharing model remains ineffective in managing the two-stage supply chain. To effectively coordinate the channel members, we propose an innovative supply chain contract that integrates the endeavors of the manufacturer and the retailer. We identify the optimal level of retail sales effort, optimal level of quality-improvement effort and optimal supply chain profit. Sensitivity analyses are conducted to examine the impacts of changes in the costs of sales effort and quality effort on the performance of the supply chain.