Designing supply contracts for perishable goods with two periods of shelf life

Abstract

A critical feature of a perishable product is its age. When “old” units are on the shelf along with “young” units, a supplier who is designing a contract for a buyer must consider the product’s age. While numerous papers in the contracting literature have discussed channel coordination, none have studied the case in which the supplier needs to account for both old and young units. This article considers a supply chain for perishable goods with a two-period shelf life to address the aforementioned supplier’s problem. A two-level wholesale price contract, a two-level buy-back contract, and a buy-back contract with channel rebates are studied. The channel-coordinating conditions under each of these contracts are demonstrated. Although all three contracts can coordinate the channel, potential implementation issues with each of them are discussed and guidance for suppliers who want to design a contract when selling both old and young units is provided.