Integrated Revenue Sharing Contracts to Coordinate a Multi-Period Three-Echelon Supply Chain

Abstract

A supply chain can be defined as a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Different entities in a supply chain operate subject to different sets of constraints and objectives under different industrial environments. Each member of a decentralized supply chain has its own decision rights to optimize its costs or benefits. Recently, the topic of decentralized supply chain modelling and analysis has been of great interest. Most of the studies on decentralized supply chain modelling have focused on designing a mechanism to fully integrate these individualistic decisions in order to ensure that the decision outcome of an individual member of the supply chain is in accordance with the decision outcome of the entire supply chain (Cachon & Lariviere, 2001; Moinzadeh and Bassok, 1998; Tsay et al., 1999). Perfect coordination mechanisms allow the decentralized supply chain to perform as well as a centralized one, in which all decisions are made by a single entity to maximize supplychain-wide profits. Several types of contractual agreements which may determine incentive mechanisms to integrate a decentralized supply chain, inclunding profit sharing (Atkinson, 1979; Jeuland and Shugan, 1983), consignment (Kandel, 1996), buy-backs (Pasternack, 1985; Emmons & Gilbert, 1987), quantity-flexibility (Tsay & Lovejoy, 1999), revenue sharing (Giannoccaro & Pontrandolfo, 2004; Cachon & Lariviere, 2005; Chang & Hsueh, 2006, 2007), revenue allocation rules (Shah et al., 2001), and quantity discounts (Dolan, 1987), etc. One of these contractual agreements, revenue sharing is a mechanism that is gaining popularity in practice and in research. Shah et al. (2001) have adopted Nash’s game theory to formulate a model which explores a fair revenue allocation mechanism among the members of a multi-tier supply chain. The model provides a compromise solution of maximized revenue for each individual member of the supply chain under the inventory and production constraints. Giannoccaro & Pontrandolfo (2004) have extended the revenue sharing contract of two-tier to a three-tier supply chain model. Cachon & Lariviere (2005) have presented the revenue sharing contract concept and discussed its influence on supply chain performances. The revenue sharing contract can be described by two parameters, retail price and retailers’ revenue retention ratio. Chang & Hsueh (2006, 2007) extended Giannoccaro & Pontrandolfo (2004) to explore a three-tier supply chain integration problem