Coordinating quality decisions in a two-stage supply chain under buyer dominance

Abstract

We consider a two-stage supply chain with imperfect quality products where the screening time acts as a decision variable affecting the quality level of the batch and influences costs and consumer demand. Our investigation centers on the seller–buyer relationship, exploring coordinated and non-coordinated buyer-dominated contracts. We propose an optimization model to analyze the impact of quality decisions, buyer dominance, and coordination. We provide analytical solutions and support them with numerical examples to illustrate the consequences of corresponding decisions for overall profitability under various assumptions.Under buyer dominance, the buyer can dictate wholesale prices and quality standards while the seller bears the burden of screening costs. As a result, the seller may be compelled to accept lower prices for their products and adhere to stricter quality standards. This situation often leads to diminished profit margins for the seller and may not benefit the buyer in the long run, as it can impact supply chain stability. However, this scenario can be improved through fair profit sharing between the buyer and seller or government intervention. Alternatively, in the coordinated scenario, the buyer and seller decide collaboratively to maximize the integrated supply chain profit. Our results demonstrate that achieving coordination and implementing optimal screening practices may create a win-win situation for supply chain partners. This coordination can increase overall supply chain profitability, decrease retail prices, and improve quality levels, ultimately enhancing consumer satisfaction.