Do the buyback contracts of undistributed stocks coordinate the supply chain?

Abstract

The concept of supply chain coordination implies that it is possible to obtain an optimal result for both independent chain participants and supply chain due to participants’ coordinated actions. This paper examines the question whether a buyback contract will be coordinating or not. The authors argue that a coordinating buyback contract should have the following substantive properties: practical feasibility, collective and individual rationality. The paper off ers a mathematical defi nition of a coordinating buyback contract which highlights these properties. Entering into buyback contract process is considered as a two-step game of two players (a supplier and retailer) on the assumption that the players are risk neutral and make decisions with full information available, the market price is fixed, and the product demand is a random variable. The authors demonstrate that the buyback contract does not coordinate the chain, however, there has been obtained a non-empty set of eff ective contracts depending on the buyback price. For such contracts, the defi nition of “conditional coordination” is given to introduce the property of a supplier’s partial rationality; its existence was proved. The findings reveal that the choice of buyback price affects the allocation of profits between chain participants so the decision on its choice must be cooperative. To substantiate the nature of cooperative choice of conditionally coordinating contracts, the asymmetric Nash solution is considered. All results were obtained both in general terms and under the assumption that the product demand has uniform distribution. For the latter case, the conditionally coordinating contract parameters were found and it was justified that the conclusion of such a contract is possible only when a supplier has greater bargain power than a retailer.

Coordinating Buyback Contract in Supply Chains with Limited Funding

“…Another approach also based on the definition from (Cachon, 2003) suggests that under the assumption of risk neutrality of the supply chain parties coordinating contract motivates each party to make decisions that provide maximum of the expected supply chain profit, i.e., each party intends to maximize individual profit and arrives at the contract parameters that maximize the supply chain profit (Berezinets, Meshkova, Nikolchenko, 2019;Berezinets et al, 2020). The authors also emphasize the equivalence of the problem of supply chain profit maximization and supply chain coordination as the latter is achieved with maximal supply chain profit.…”

“…Applying this approach to studying such contract types as revenue sharing (Zenkevich, Gladkova, 2018), sales rebate (Berezinets, Meshkova, Nikolchenko, 2019) and buyback contract (Berezinets et al, 2020), the authors come to a conclusion that these contracts do not allow to achieve supply chain coordination for their application maximizes only the retailer's and the supply chain profit, and not the supplier's. They introduce the definition of conditionally coordinating contract that allows to achieve maximal retailer's profit, improve the supplier's profit compared to that earned with the wholesale-price contract, and, thus, maximizes the supply chain profit, which is the sum of the supplier's and retailer's profits.…”

“…Buyback contracts are commonly applied when the product demand is difficult to predict and the risk of obsolescence of the product may be high (Tsay, 2001). Examples of such industries are publishing and book selling business, fashion and beauty retail, retailing seasonal products and those with short life cycle, such as FMCG and grocery retail (Pasternack, 1985;Tsay, 2001;Bose, Anand, 2007;Berezinets et al, 2020).…”

“…In this setting the supplier has the advantage of optimizing her profit function based on the retailer's response and knowing his profit function. Consequently, the buyback contract with limited funding can be defined as a combination of three parameters (b, ω, q), which is the same way as usual buyback contract with no additional conditions is defined (Berezinets et al, 2020). Definition 1.…”

“…Supply chain coordination by this definition fails virtually for all contract types studied in the field of supply chain contracting, which is why the term "conditional coordination" is used. The term "conditional coordination" of the supplier-retailer supply chain indicates a situation where the set of the contract parameters ensures maximal retailer's profit, improves the supplier's profit relative to the wholesale-price contract instead of maximizing it, and thus maximizes supply chain's profit (Berezinets et al, 2020).…”