Coordinated decision-making on manufacturer’s EPQ-based and buyer’s period review inventory policies with stochastic price-sensitive demand: A credit option approach

Abstract

Pricing and replenishment decisions are no longer internal issues within organizations and it is of high significance to coordinate such primary decisions from a supply chain (SC) perspective. In this study, for the first time, we develop a new method based on credit option to coordinate production, pricing, and periodic review policy decisions considering a manufacturer-buyer chain under price-sensitive stochastic demand. In the studied SC, the buyer applies a periodic review order-up-to level inventory policy and its decision variables are order-up-to level, selling price and review period. In this case, the manufacturer follows an economic production quantity (EPQ) policy and decides on production multiplier. Firstly, exact algorithms in addition to concavity analysis are addressed to find optimal decisions in centralized and decentralized structures. Afterwards, a credit option mechanism is proposed to obtain mutually acceptable decisions and create a win–win situation for the manufacturer and buyer. Numerical examples and sensitivity analysis along with a real case study are carried out to show the applicability and performance of the credit option contract. The results reveal the capability of the proposed credit option contract in coordinating pricing, production, and periodic review replenishment decisions; thereby encouraging both sides to accept the coordination mechanism. Moreover, the results indicate that the proposed credit option contract can even improve the SC profit more than centralized model under some circumstances.