Selling to Profit-Target-Oriented retailers: Optimal supply chain contracting with bargaining

Abstract

Achieving pre-determined profit targets is a common objective for many retailers. In a supply chain system, how to optimize the whole system with this type of retailers is an important problem. In this paper, we theoretically study this supply chain optimization (“coordination”) problem with the consideration of bargaining powers of supply chain agents. In the basic model, we first prove that depending on the profit target value, the way that the retailer orders with a profit target is similar to that he orders with risk preference (e.g., risk seeking, risk neutral or risk averse). We demonstrate how different commonly applied contracts (which include the two-part-tariff (TPT), sales-rebate (SRB) and revenue sharing (RSG) contracts) can optimize the supply chain system. Moreover, we find that with downside risk minimization considerations, the TPT contract and RSG contract are non-inferior but the SRB contract is dominated by the TPT contract. To generate more insights, in the extended models, we explore several separate cases with (i) multiple retailers, (ii) two products, and (iii) using “variance of profit” as the risk measure. We uncover that the main findings in the basic model remain robust and valid, even though the two-product scenario involves a case which is much more complicated than the case with one-product. Moreover, the TPT contract appears to be the most powerful one among the contract candidates under explorations. This paper contributes to the literature of supply chain management, and also provides practical insights for industrialists with the use of supply chain contracts.