A comparison of channel coordination performance for some contracts in newsvendor-type inventory models

Abstract

Recently, there have been a growing number of studies on supply chain contracts that attempt to coordinate a distribution channel. However, most of these studies focus on studying the properties of a single type of contracts in a decentralized channel. Little has been done on comparing the performance among different types of contracts. This study examines the performance of three kinds of contracts, namely, the “price-only,” the “buyback” and the “revenue-sharing” contracts. Under the classical newsvendor-problem framework, we first examine each contract’s performance in a distribution channel consisting of one supplier and one retailer. The second channel that we considered is one with two competing retailers supplied by one manufacturer. We compare and contrast these three contracts in each of these two channels. The manufacturer-retailer interface is characterized by a game theory structure; i.e., the manufacturer is a Stackelberg leader and the retailer is a follower. Regarding the demand elasticity, a linear price-dependent demand model is assumed. Among the three kinds of contracts, we find that “revenue-sharing” is best for the purpose of attaining higher channel efficiency and manufacturer’s expected profit; however, it is less favourable from the retailer’s perspective. On the other hand, “buy-back” appears to provide the better compromise between the manufacturer’s and the retailer’s interests. Other characteristics of the three kinds of contracts are also studied. For example, we show that “revenue-sharing” is affected most by the price-sensitivity factor represented with the coefficient of demand curve but least affected by the demand variability represented with standard deviation of demand. Compared to the one-retailer channel, we find that in a two-retailer channel the channel efficiency improves significantly, but the retailers’ profit share becomes less.

Date of Award	4 Oct 2004
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Hon Shiang LAU (Supervisor)