Contracting in a newsvendor problem

Contracting in a newsvendor problem Purpose – Contracting is an important issue in supply chain management. In this paper, the authors aim to discuss and compare the manufacturer's contracting options when the retailer faces a traditional newsvendor problem with a fixed retail price: a wholesale price only contract, a wholesale price discount contract, a returns policy contract, and a returns policy with the wholesale price discount contract. The paper also aims to examine how these contracting options affect decisions of the manufacturer and the retailer, as well as the supply chain efficiency. Design/methodology/approach – Models are developed based on the manufacturer's four contracting options. The manufacturer's optimal wholesale prices have been obtained. The ordering decisions of the retailer are discussed in each of the manufacturer's four contracting options. The paper also uses numerical examples to illustrate the author's managerial insights and results. Findings – As compared to the wholesale price only contract, it is found that implementing a wholesale price discount policy effectively encourages the retailer to order more product and enhances the retailer's profit at the expense of lowering the manufacturer's profit. It is also found that when the manufacturer offers a returns policy and if this policy cannot enhance the retailer's profit, a returns policy with the wholesale price discount contract can lead to a win‐win situation for both the manufacturer and the retailer. Originality/value – The research provides managerial insights on how different contracts affect decisions and efficiency of the supply chain. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Modelling in Management Emerald Publishing

Contracting in a newsvendor problem

Journal of Modelling in Management, Volume 7 (3): 15 – Oct 26, 2012

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
1746-5664
DOI
10.1108/17465661211283250
Publisher site
See Article on Publisher Site

Abstract

Purpose – Contracting is an important issue in supply chain management. In this paper, the authors aim to discuss and compare the manufacturer's contracting options when the retailer faces a traditional newsvendor problem with a fixed retail price: a wholesale price only contract, a wholesale price discount contract, a returns policy contract, and a returns policy with the wholesale price discount contract. The paper also aims to examine how these contracting options affect decisions of the manufacturer and the retailer, as well as the supply chain efficiency. Design/methodology/approach – Models are developed based on the manufacturer's four contracting options. The manufacturer's optimal wholesale prices have been obtained. The ordering decisions of the retailer are discussed in each of the manufacturer's four contracting options. The paper also uses numerical examples to illustrate the author's managerial insights and results. Findings – As compared to the wholesale price only contract, it is found that implementing a wholesale price discount policy effectively encourages the retailer to order more product and enhances the retailer's profit at the expense of lowering the manufacturer's profit. It is also found that when the manufacturer offers a returns policy and if this policy cannot enhance the retailer's profit, a returns policy with the wholesale price discount contract can lead to a win‐win situation for both the manufacturer and the retailer. Originality/value – The research provides managerial insights on how different contracts affect decisions and efficiency of the supply chain.

Journal

Journal of Modelling in ManagementEmerald Publishing

Published: Oct 26, 2012

Keywords: Newsvendor problem; Supply chain management; Demand uncertainty; Returns policy; Wholesale price discount; Contracts; Demand management; Supply and demand

References

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