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

Abstract

This paper proposes a Stackelberg game-based approach for channel coordination for a supply chain consisting of one supplier and two competing retailers facing stochastic demand that is sensitive to both sales effort and retail price. In the proposed approach, the supplier, as the leader, defines the contract format and parameters, and the retailers determine the order quantity, retail price and sales effort. The literature primarily focuses on the design of the contract parameters to ensure channel coordination, whereas much less attention is given to the analysis of conditions supporting the contract implementation. This study focuses on the implementation of the return policy with sales rebate and penalty (RSRP) contract as a coordination mechanism. The negotiation and trading procedure among supply chain members is modeled using a simulation optimization-based decision support tool. The possibility that the retailers impose their own preferences that disturb the channel coordination after signing the RSRP contract is analyzed and a new limited return policy with sales rebate and penalty (LRSRP) contract, which helps the supplier guarantee channel coordination and control retailer decisions, is proposed.