The effect of decision rights allocation on a supply chain of perishable products under a revenue-sharing contract

Abstract

Using the framework of an economic order quantity (EOQ) model, we study marketing and operational decisions in a two-echelon supply chain in which a retailer and a manufacturer use a revenue-sharing contract to sell a perishable product. The demand function is sensitive to price, sales effort and the age of the product on shelf. We take into account the issue of decision rights allocation with respect to both sales-effort investment and replenishment policy. In particular, we investigate and compare the performance of the individual parties and of the total supply chain across six scenarios: three in which the investment in sales effort is made by the retailer, and three in which the investment in sales effort is made by the manufacturer, where in each group the cycle length is set either by the retailer, by the manufacturer or in a cooperative manner. We show that when one party determines the cycle length, there are certain conditions under which a two-part tariff contract can be used by the other party in order to influence the cycle length decision, and thus to increase its profits. In addition, we show that there are cases in which both parties benefit when the manufacturer is responsible for investing in sales effort, such that it is in the retailer's interest to give up her decision right in this regard.