Coordinating a decentralized supply chain with capacity cost compensation

• Published in: R.A.I.R.O. Recherche opérationnelle Vol. 55; pp. S1789 - S1802
• Main Authors: Shan, Feifei, Dai, Xiaopei, Men, Jinqi, Yang, Feng
• Format: Journal Article
• Language: English
• Published: Paris EDP Sciences 2021
• Subjects: Compensation; Game theory; Revenue; Revenue sharing; Supply chains
• ISSN: 0399-0559; 1290-3868
• DOI: 10.1051/ro/2020056

Capacity planning, as a vital asset, is a challenge problem for firms in various industries, such as organic agriculture, apparels and high-tech industry. However, many manufacturers are conservative about their capacity investment for a variety of reasons. As a result, many retailers have the motivation to stimulate manufacturers to enhance the capacity level. In this paper, we propose a revenue sharing and capacity cost compensation contract to help the retailer stimulate her manufacturer to increase the capacity level. In the contract, the retailer keeps a portion of sales revenue and compensates for the manufacturer’s capacity cost. They face a stochastic demand and play a Stackelberg game where the retailer acts as a leader and the manufacturer acts as a follower. We prove that the channel can be perfectly coordinated through our proposed contract. Moreover, we give a feasible range of profit distribution, in which both channel members can earn no less profit than that in non-cooperation. Meanwhile, comparing with centralized channel with multiplicative demand, we find that capacity in decentralized channel tends to be lower.