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Supply Chain Channel Coordination Under Sales Rebate Return Policy Contract Using Simulation Optimization

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Supply Chain Channel Coordination Under Sales Rebate Return Policy Contract Using Simulation Optimization Scientia Iranica E (2014) 21(6), 2295{2306 Sharif University of Technology Scientia Iranica Transactions E: Industrial Engineering www.scientiairanica.com Supply chain channel coordination under sales rebate return policy contract using simulation optimization M. Darayia, H. Eskandaria; and C.D. Geigerb a. School of Industrial Engineering, Tarbiat Modares University, Tehran, P.O. Box 14117, Iran. b. Department of Industrial Engineering and Management Systems, University of Central Florida, Orlando, FL 32816, USA. Received 25 May 2012; received in revised form 17 September 2013; accepted 14 January 2014 KEYWORDS Abstract. This paper proposes a Stackelberg game-based approach for channel coor- dination for a supply chain consisting of one supplier and two competing retailers facing Supply chain stochastic demand that is sensitive to both sales e ort and retail price. In the proposed coordination; approach, the supplier, as the leader, de nes the contract format and parameters, and Return policy with the retailers determine the order quantity, retail price and sales e ort. The literature sales rebate and primarily focuses on the design of the contract parameters to ensure channel coordination, penalty contract; whereas much less attention is given to the analysis of conditions supporting contract Simulation; implementation. This study focuses on implementation of the Return policy with a Sales Price- and e ort- Rebate and Penalty (RSRP) contract as a coordination mechanism. The negotiation dependent demand. and trading procedure among supply chain members is modeled using a simulation SRP: Sales Rebate optimization-based decision support tool. The possibility that retailers impose their own and Penalty; preferences that disturb channel coordination after signing the RSRP contract is analyzed, RSRP: Return policy and a new Limited Return policy with a Sales Rebate and Penalty (LRSRP) contract, with Sales Rebate and which helps the supplier guarantee channel coordination and control retailer decisions, is Penalty; proposed. LRSRP: Limited return policy with Sales Rebate and Penalty. © 2014 Sharif University of Technology. All rights reserved. 1. Introduction members who use distributed local decision-making optimization strategies in order to make decisions The objective, in this paper, is to examine the use of considering their own preferences, their own constraints sales rebates or penalties as contract incentives and and their own objectives, and who only care about their impact on channel relationships and decision- their monetary payo s (generally, pro ts). This fo- making among supply chain member rms. Supply cus on monetary payo s results in the well-known chain channel coordination and decision-making are phenomenon of double marginalization, where each generally approached from two di erent relationship member's pro t is optimized but the overall integrated perspectives; decentralized or centralized, although supply chain channel pro t margin is suboptimal [1]. hybrid shared partnerships exist. Decentralized sup- Centralized supply chains involve a single ply chain relationships involve several self-interested decision-maker who possesses information regarding the overall supply chain, and the supply chain members operate under a global decision-making optimization *. Corresponding author. Tel.: +98 21 82884323; E-mail addresses: [email protected] (M. strategy. In general, better overall supply chain Darayi); [email protected] (H. Eskandari); economic performance results, although the global [email protected] (C.D. Geiger) optimization strategy causes economic penalties for 2296 M. Darayi et al./Scientia Iranica, Transactions E: Industrial Eng. 21 (2014) 2295{2306 some local members. This is due to increased levels of advantage in using simulation is in its ability to model information sharing among all supply chain members, the uncertainty, interaction and non-linearity of rela- and centralized planning and control, which ensures tionships between the di erent members. This allows e ective channel coordination. This supports not only relaxation of some simplifying assumptions made by aligning the preferences, constraints and objectives of previous researchers to increase the tractability of the the individual supply chain members, but also sup- problem, such as assuming independent deterministic ports overall system-wide performance. In centralized demand, a monopoly market and no advertising, to decision-making scenarios, supply chain contracts are name a few. coordination mechanisms that help to incentivize the The main contributions of this research are the independent members to engage and participate in following. First, the channel coordination problem centralized supply chain channel coordination. in a supply chain consisting of one supplier and two In this research, the focus is centralized channel competing retailers facing stochastic demand that is coordination exploring the use of channel sales rebate sensitive to both sales e ort and retail price, has not or penalties as sales incentives, speci cally in a two- been studied in the literature to date. Second, by tier supply chain, where the supply chain con guration analyzing the implementation of the RSRP contract, consists of a single supplier and two competing retail- a new exible LRSRP contract that can achieve ap- ers. propriate channel coordination in the supply chain Coordination contract models have been studied is proposed. Finally, the proposed contract design and developed in recent years [1-8]. It is now becoming methodology, consisting of simulation optimization, popular to model supply chains as agent-based sim- can aid in investigating the coordination problem. ulation systems, or to use discrete event simulation The remainder of this paper is organized as to learn more about their behavior or investigate the follows. In Section 2, the problem, model assumptions implications of alternative con gurations [9]. Yu et and notations are described. The proposed analytical al. [10] studied the impact of supply disruption on models for cases of decentralized and centralized sup- the supply chain system using simulation, where the ply chains are presented in Section 3. Coordination researchers used two di erent distribution functions of models for RSRP and LRSRP contracts are proposed random variables to characterize the disruption and its in Section 4. The proposed simulation optimization- impact. based methodology for contract design is presented in Many previous studies have investigated contracts Section 5. Section 6 illustrates the proposed methodol- for channel coordination within a supply chain, whereas ogy via a numerical example, and Section 7 concludes much less emphasis has been placed on implementation the work, including discussion of future directions of of these contracts and the necessary supporting condi- this research e ort. tions for their maintenance. The focus in this paper is the implementation of a Return policy with a Sales 2. Problem description and Rebate Penalty (RSRP) contract in a supply chain consisting of one supplier and two competing retailers This research investigates a channel coordination prob- facing stochastic demand, which is sensitive to both lem in a two-tier supply chain composed of a supplier sales e ort and retail price. The negotiation procedure and two competing retailers. The retailers face a among supply chain members is model optimized via random demand that is sensitive to not only sales e ort, simulation. The possibility of retailers imposing their but also retail price. The supplier, with knowledge of own preferences after instituting the RSRP contract, the demand, de nes the format of the contract and which may potentially upset channel coordination, is the requisite parameters to achieve the overall best analyzed, and a new Limited Return policy with a SRP performance of the supply chain that achieves a win- (LRSRP) contract, which helps the supplier to ensure win situation for all participants in the contract. The channel coordination, is proposed. In fact, in a RSRP information and logic ow of the sequence of events, contract, it is possible for retailers to readjust their shown pictorially in Figure 1, is as follows: order quantities, retail prices and sales e orts within I. The supplier o ers a contract to two retailers for the parameters of the contract. an upcoming selling season. In this research, the presence of two competing retailers with de nite opinions on order quantity, e ort II. The two competing retailers, upon reviewing and level and retail price, and the stochastic nature of agreeing to the terms of the supplier's contract, demand, make it dicult to model and solve the determine their individual order quantities, retail channel coordination problem analytically, due to its prices and levels of e ort. inherent complexity. Simulation optimization is used III. The supplier production and delivery of the prod- to model the stochasticity of demand and addresses this uct to the two retailers are scheduled to occur supply chain channel coordination problem. A major before the selling season. M. Darayi et al./Scientia Iranica, Transactions E: Industrial Eng. 21 (2014) 2295{2306 2297 Cr : Marginal cost at the retailers per unit; W : Wholesale price. Decision variables for the retailers Pr1 : Retail price at Retailer 1; Pr2 : Retail price at Retailer 2; er1 : E ort level of Retailer 1 to promote sales; er2 : E ort level of Retailer 2 to promote sales; Figure 1. 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