Multi-criteria Performance Comparison of Supply-chain Contract Schemes, with Special Emphasis on Controversial and New Schemes

Project: Research

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Consider a supplier selling a product to a retailer, who in turn retails it to consumers. The most common “contract scheme” (“C-scheme”) between the supplier and the retailer is “price only;” i.e., the retailer pays a wholesale price w for each of the Q units she buys from the supplier. A more complex yet widely accepted C-scheme is “volume discounting,” under which the supplier offers lower w-values for larger Q-values. “New” or theoretically proposed C-schemes not yet prevalent in the real world include “menu of contracts” and a “retailer-implemented volume discount.” Increasingly prevalent C-schemes that are also becoming increasingly controversial in (say) China and the U.S. include “resale price maintenance” and “slotting fees.” The consequences of applying each of these C-schemes vary substantially with the “characteristics” of the supply chain in which the C-scheme operates.A supply chain “scenario” can be defined by of specifying, among others, the following “characteristics”: (a) who is designing the C-scheme? (b) what is the demand-curve format? (c) how is demand’s uncertainty perceived? (d) how uncertain are the various system parameters to the C-scheme designer? For a variety of “scenarios” to be defined under the above structure, the researchers will study the performance of various C-schemes, with emphasis on the controversial C-schemes as well as the development of “new” C-schemes not yet seen in the market. The criteria for evaluating “performance” in this project will include not only the benefits to the C-schemes designer, but also benefits to other supply-chain stakeholders.For example, as work in progress, the researchers are able to show that, when a dominant retailer gets to design a C-scheme for a “newsvendor” product with stochastic demand and she is uncertain of the supplier’s unit cost, she can use the new “retailer-implemented volume discount” C-scheme to improve her expected profit, regardless of the demand-curve’s format. However, if the product’s demand is not stochastic, then retailer-implemented volume discount can effectively improve the retailer’s profit only under a linear demand curve, but not under an iso-elastic demand curve. The researchers are also able to show that this new C-scheme typically leads to lower retail prices and higher retail volumes – plausible indicators of benefits to the consumers.


Project number9041458
Grant typeGRF
Effective start/end date1/01/1012/03/13