Supply chain coordination with sales-rebate contract

Abstract

The problem of supply chain coordination can be solved by applying coordination mechanisms aimed at motivating supply chain partners for concerted actions leading to the improvement of the supply chain performance, taking into account the partners’ individual interests. One of such mechanisms is coordinating contracts. In this paper the authors consider a solution to the coordination problem using a sales-rebate contract for the supply chain, consisting of a supplier and a retailer, assuming that the demand is stochastic and the product retail price is fixed. A rebate is a reward that a supplier pays to a retailer for each unit of a product sold over a sales threshold specified. The sales-rebate contract aims to motivate the retailer to sell more and thus earn a rebate per unit sold. This type of contract is actively used in the interaction between the manufacturer and retailer. The authors proposed a mathematical formulation of the supply chain coordination problem, formalized the process of the sales-rebate contract conclusion as a threestep game of two players, and formulated the definition of a coordinating contract. The article presents the developed algorithm for constructing a coordinating sales-rebate contract in supply chains, both for the general case and for the case when the contract parameters are additionally restricted. It has been proven that a sales-rebate contract is not coordinating without additional restrictions on the contract parameters. The algorithm proposed is implemented in the case of the Hong Kong supply chain, consisting of a manufacturer and retailer of children’s clothes.