Coordinating orders in supply chains through price discounts

In this paper, we examine the issue of order coordination between a supplier and multiple retailers in a decentralized multi-echelon inventory/distribution system where the supplier provides a product to multiple retailers who experience static demand and standard inventory costs. Specifically, we propose and analyze a new policy where a manufacturer, who outsources production to an Original Equipment Manufacturer, offers a price discount to retailers when they coordinate the timing of their orders with the manufacturer/s order cycle. We show that our proposed policy can lead to more efficient supply chains under certain conditions, and present a straightforward method for finding the manufacturer's optimal price discount in this decentralized supply chain. A numerical experiment illustrates the managerial implications of our model as well as conditions when a manufacturer should consider adopting such a policy.