Coordinating a two-level supply chain with delay in payments and profit sharing

Achieving effective coordination among suppliers and retailers has become a pertinent research issue in supply chain management. Channel coordination is a joint decision policy achieved by a supplier(s) and a retailer(s) characterized by an agreement on the order quantity and the trade credit scenario (e.g., quantity discounts, delay in payments). This paper proposes a centralized model where players in a two-level (supplier-retailer) supply chain coordinate their orders to minimize their local costs and that of the chain. In the proposed supply chain model the permissible delay in payments is considered as a decision variable and it is adopted as a trade credit scenario to coordinate the order quantity between the two-levels. Computational results indicate that with coordination, the retailer orders in larger quantities than its economic order quantity, with savings to either both players, or to one in the supply chain. Moreover, a profit-sharing scenario for the distribution of generated net savings among the players in the supply chain is presented. Analytical and experimental results are presented and discussed to demonstrate the effectiveness of the proposed model. (c) 2006 Elsevier Ltd. All rights reserved.