How a novel option contract helps a green product to enter a traditional product's retailing channel: A mathematical modeling approach

Abstract

Multi-sourcing is a practical strategy in retail channels that allows retailers facing uncertainties to respond more effectively to consumers' needs by distributing market demand across multiple supply sources. In this respect, this research investigates a price-setting retailing channel, including two manufacturers (a traditional manufacturer and a green manufacturer) and one retailer where end-of-life products can be collected. The retailer faces an uncertain price-dependent demand and sets orders from both supply directions based on a low-cost ordering approach. The primary purpose of this study is to develop an optimal solution to allow the green product to enter the retailing channel of the non-green product. Accordingly, this research develops and compares two different contractual mechanisms from the standpoint of the green manufacturer/retailer and the supply chain (SC): (1) a penalty-based contract and (2) a modified call option contract mixed with a cost-sharing mechanism. The main contribution of the current paper is to investigate an option contract for the effective management of a closed-loop supply chain and combine it with a cost-sharing contract as a new approach. Another contribution is that the developed model considers two practical channels for collecting and returning obsolete products to the green manufacturer: (1) the retailer is responsible for collecting and returning obsolete products, and (2) collecting and returning obsolete products is outsourced to a third-party logistics provider (3PL). Eventually, the models' efficiency is verified by investigating different numerical experiments, discovering that the proposed reservation-based contract outperforms the penalty-based contract for both parties' profitability and retailing channel's improvement. Besides, the present study finds that hiring 3PL significantly increases the green manufacturer's profit compared to other scenarios.