Supply chain coordination with profit-sharing agreements

Abstract

The purpose of this research is to develop a two-state supply chain inventory model that simultaneously coordinates supplier selection, inventory replenishment, and pricing decisions. The set of potential suppliers and the buyer represent the stages in this setup. Buyer and suppliers trade a single product that experiences a price-sensitive demand. We consider capacitated suppliers whose performance is bounded by fixed production rates. Within this framework, we obtain the structure of the optimal inventory policies within a mixed integer nonlinear model, proving that the zero-inventory ordering policy is still optimal, and proposing a new generalized nested inventory policy. In addition, we propose a profit sharing contract to tackle the conflicting objectives of the competing firms within an integrated supply chain optimization model. © 2018 Institute of Industrial Engineers (IIE). All rights reserved.