Credit and discount incentive options for two-level supply chain coordination, under uncertain price-dependent demand

Abstract

In this article, we propose a two-level supply chain (SC) consisting of a single supplier who supplies one type of product to a single retailer. The market demand rate for the product is uncertain and sensitive to the selling price of the retailer. The objectives of this paper are to determine simultaneously pricing and ordering policies for the retailer, as well as to specify number of replenishments (shipping policy) for the supplier. Firstly, the problem is formulated under decentralized SC structure where each member optimizes his/her decisions regardless of the others’ profitability. Then, a centralized SC structure was proposed and optimized based upon the whole SC profitability. Afterwards, we developed coordinated SC structures to guarantee the members’ participation in which, two mechanisms include credit payment period and the wholesale price discount incentives, were introduced based on profit-sharing strategy and by using the members’ bargaining power. The desirability of the proposed mechanisms has been examined from the view point of each SC members in the competitive market. To this end, numerical examples and sensitivity analyses were provided to illustrate the theoretical results of the proposed model by comparing the profit values in three decentralized, centralized, and coordination structures.