A framework for evaluation of coordination by contracts: A case of two-level supply chains
Computers and Industrial Engineering
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IEEE Transactions on Systems, Man, and Cybernetics, Part A: Systems and Humans - Special issue on model-based diagnostics
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Decision Support Systems
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A contract is a mechanism to realize the performance improvement of a supply-chain system or to achieve the perfect coordination of a supply-chain channel. This paper deals with the coordination issue of a selling channel for a short-life-cycle product. First, a new type of contract combining the return policy with markdown money according to the practice under which some companies sell their products with different marketing policies in different selling periods is designed. This case is illustrated using a stochastic dynamic-programming model. Then, the necessary condition to achieve channel coordination with this combined contract is derived; and given the scheme to allocate the coordination profit, the generalized method to find the optimal contract parameters is developed. Lastly, with analysis and simulations, it can be concluded that the supply-chain coordination with the single contract in literatures for two-period selling depends on the demand distribution and the cost structure of a system, but the combined contract that was designed depends only on the cost structure of a system. It can further be concluded that the combined contract can ensure channel coordination and arbitrarily allocate coordination profit, and that the combined contract is generalized with several classical contracts as its special examples. Furthermore, the supplier will become the active initiator of the combined contract under the high-risk setting because the combined contract can strengthen his status in the channel system and improve his performance.