Coordination through a quantity-incentive mechanism in a single-manufacturer-single-retailer supply chain
by Taebok Kim, Yushin Hong, Suresh Kumar Goyal
International Journal of Services and Operations Management (IJSOM), Vol. 5, No. 4, 2009

Abstract: A reasonable profit-sharing mechanism should be implemented to guarantee supply chain stability, since all of the participants naturally try to optimise their own benefits. A system-wide optimal policy should be well aligned with each participant's individual beneficial viewpoint. In this paper, we develop a fair and equitable mechanism of sharing the profits achieved due to cooperation in a supply chain between a single manufacturer and a single retailer. At first, we take into account the bargaining dynamics between them. We assume that the current supply chain is not coordinated such that the leader (the dominating partner) determines the lot size unilaterally. The follower (the weak partner) proposes to pay a compensatory payment according to the leader's modified lot size. Throughout this lot size-dependent compensation called a 'quantity-incentive mechanism', we investigate how the modified lot size and the corresponding compensatory payment can be determined so that the parties are willing to cooperate.

Online publication date: Fri, 10-Apr-2009

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