Two-stage supply chain coordination through credit option in asymmetric information environment

Abstract

Literature on integrated inventory models has shown that both buyer and manufacturer can be better off by adopting the joint optimum order quantity. However, the implementation of a joint optimal policy requires coordination and cooperation between the members of the supply chain. A critical assumption made throughout the integrated inventory models literature is that the manufacturer/supplier has complete information about the buyer's cost structure. But in the actual supply chain, this assumption is seldom to be satisfied. In this paper, a model for coordination between the two independent members of the supply chain through credit option is developed when the firms are not willing to share cost related information including the desired profit target from the business. A procedure for negotiation is developed to divide the surplus generated due to coordination. Finally, the developed procedure is illustrated through a numerical example.