Coordinating supply chains with sales rebate contracts and vendor-managed inventory

Abstract

Coordinating supply chains is an effective way to improve channel performance. This paper details how a sales rebate contract helps achieve supply chain coordination which allows decentralized decisions of chain members to perform a centralized decision for the whole system. A model in the context of a two-echelon supply chain with a single supplier serving multiple retailers in vendor-managed inventory (VMI) partnership is proposed. VMI facilitates the application of the sales rebate contract since information sharing in VMI partnership allows the supplier to obtain actual sales data in a timely manner and determine the rebate for retailers. Retailers are considered in two scenarios: independent retailers with a demand function sensitive only to their own price and competing retailers with a demand function depending on all retailers’ prices. The proposed model demonstrates that the supplier gains more profit with competing retailers than without as competition among the retailers lowers the prices and thus stimulates demand.