Coordinating Contracts for Decentralized Supply Chains with Retailer Promotional Effort

Abstract

In this paper, a risk-neutral manufacturer sells a single product to a risk-neutral retailer. The retailer chooses inventories ex ante and promotional effort ex post. If the wholesale price exceeds marginal production cost, the retailer orders fewer than the joint profit-maximizing inventories. If the manufacturer attempts to coordinate inventories by buying back unsold units, then the retailer's promotional incentives are dulled. Under very general assumptions on the form of the effort function, we show that buy-backs adversely affect supply chain profits, and higher buy-back prices imply lower profits. Also, while a buy-back alone cannot coordinate the channel, coupling buy-backs with promotional cost-sharing agreements (if effort cost is observable), offering unilateral markdown allowances ex post (if demand is observable but not verifiable), or placing additional constraints on the buy-back (if demand is observable and verifiable) does result in coordination. This problem is not limited to returns policies but is shown to hold for a much larger set of contracts. The results are quite robust (e.g., when the retailer chooses effort before observing demand), but coordinating contracts become more problematic if, for example, the retailer also stocks substitutes for the manufacturer's product. Other model extensions are also discussed.supply chain management, sales effort, promotional effort, supply contracts, incentives, channel coordination, inventory management, buyback, returns policies, cost sharing, markdown allowance

A Literature Review on Supply Chain Contracts Selection and Coordination under Competing Multi Manufacturers

“…Wang et al (2004)considered the external demand related with price, the revenue sharing contract is discussed, and the different assumptions on two kinds of demand price have carried on the contrastive analysis. But the revenue sharing contract are used such a premise: supply chain revenue from all the retailers, the supply chain revenue is observed for members, researched by Krishnan et al (2004). Cachon and Lariviere (2005) proposed in general revenue sharing contract analysis framework.…”

Brand Franchise Supply Chain Partnership Based on Online and Offline Integrating Strategy

“…The supply chain contracting literatures have been widely researched and analyzed to coordinate the supply chain partnership [16,17]. Pasternack (1985), Donohue (2000), Taylor (2002) and Krishnan et al (2004) have studied the return policies and buyback agreements for perishable commodities such as consumer electronics, computers, software, books, magazines, newspapers, cosmetics, and so forth, which the manufacturer offers retailers a partial credit for all unsold goods with the agreed-upon price clause can achieve the supply chain coordination [18][19][20][21].…”

Who Benefits from Altruism in Supply Chain Management?

“…For instance, [16] examines coordinating contracts of a decentralized supply chain in which the retailer can choose promotional effort. For a channel rebate contract, [17] employs a simple model in which a retailer makes ordering and effort decisions and then observes demand.…”