Coordinated order and production policies in supply chains

Abstract

This paper is focused on the coordination of order and production policy between buyers and suppliers in supply chains. When a buyer of an item decides independently, he will place orders based on his economic order quantity (EOQ). However, the buyer’s EOQ may not lead to an optimal policy for the supplier. Should the buyer have the more powerful position to enforce his EOQ on the supplier, then no incentive exists for him to deviate from his EOQ. To provide an incentive to order in quantities suitable to the supplier, the supplier could offer a price discount or side payment. One critical assumption made throughout the literature dealing with incentive schemes to influence buyer’s ordering policy is that the supplier has complete information regarding buyer’s cost structure. This paper provides a bargaining model with asymmetric information about the buyer’s cost structure. A self-selection model for the determination of an optimal set of contracts which are specifically designed for different cost structures of the buyer, assumed by the supplier, will be presented.