Supply Chain
Channel coordination through a revenue sharing contract in a two-period newsboy problem
Cao To Linh and Yushin Hong
Department of Industrial and Management Engineering
POSTECH, Korea
Abstract
This paper studies channel coordination through revenue sharing contract between a single retailer and a single wholesaler in a two-period newsboy problem. Two models are discussed, a single-buying-opportunity model and a two-buying-opportunity model. We discuss how the revenue sharing ratio and the wholesale prices are to be determined in order to achieve channel coordination and a win-win outcome. We find that the wholesale prices are set to be lower than the retail prices and the optimal revenue sharing ratio is linearly increasing in the wholesale prices. The proposed revenue sharing contract has more flexibility than price protection, in that the optimal revenue sharing ratio can be settled reasonably through negotiation between the retailer and wholesaler.
Key words: Supply Chain Management, Channel Coordination, Revenue sharing contract, Two-period newsboy problem.
1. Introduction The life cycles of technology-based products are rapidly becoming shorter through continuous technological innovation. For example, Korean manufacturers of cellular phones introduce more than 50 new models each year, and the average life cycle of cellular phones in Korea is less than 10 months. As new products are introduced into the market, demand for old products tends to shrink and suppliers cannot avoid declines in wholesale prices. Thus, retailers are apt to delay their purchases and/or reduce their purchasing quantities. On the other hand, suppliers try to induce retailers to purchase and stock greater quantities of products at an early stage. Hence, it is necessary to develop an appropriate coordination mechanism that is beneficial to all parties in the supply chain.
This paper adopts a two-period newsboy model in a supply chain consisting of a single
Cao To Linh and Yushin Hong
Department of Industrial and Management Engineering
POSTECH, Korea
Abstract
This paper studies channel coordination through revenue sharing contract between a single retailer and a single wholesaler in a two-period newsboy problem. Two models are discussed, a single-buying-opportunity model and a two-buying-opportunity model. We discuss how the revenue sharing ratio and the wholesale prices are to be determined in order to achieve channel coordination and a win-win outcome. We find that the wholesale prices are set to be lower than the retail prices and the optimal revenue sharing ratio is linearly increasing in the wholesale prices. The proposed revenue sharing contract has more flexibility than price protection, in that the optimal revenue sharing ratio can be settled reasonably through negotiation between the retailer and wholesaler.
Key words: Supply Chain Management, Channel Coordination, Revenue sharing contract, Two-period newsboy problem.
1. Introduction The life cycles of technology-based products are rapidly becoming shorter through continuous technological innovation. For example, Korean manufacturers of cellular phones introduce more than 50 new models each year, and the average life cycle of cellular phones in Korea is less than 10 months. As new products are introduced into the market, demand for old products tends to shrink and suppliers cannot avoid declines in wholesale prices. Thus, retailers are apt to delay their purchases and/or reduce their purchasing quantities. On the other hand, suppliers try to induce retailers to purchase and stock greater quantities of products at an early stage. Hence, it is necessary to develop an appropriate coordination mechanism that is beneficial to all parties in the supply chain.
This paper adopts a two-period newsboy model in a supply chain consisting of a single