Coordination of a Supply Chain with Advertising Investment and Allowing the Second Ordering

Tiaojun Xiao, Xinxin Yan, Jiabao Zhao

.

DOI: 10.4236/ti.2010.13022                

Abstract

This paper develops a game theoretic model of a one-manufacturer and one-retailer supply chain allowing the second ordering to investigate how to coordinate the order quantity and advertising investment via a markdown money-cooperative advertising contract. We focus on the effects of allowing the second ordering on equilibrium outcome and coordination mechanism. We find: the relationship between the unit wholesale prices and the chargeback rate depends on whether allowing the second ordering; the coordination mechanism is robust to demand uncertainty; the unit wholesale price in period 2 increases with the unit production cost in period 2, the unit delayed delivery cost and unit salvage value if and only if the chargeback rate is sufficiently small while that in period 1 is independent of them. In addition, we study the Pareto condition of coordination mechanism under which both manufacturer and retailer are better off using the coordination mechanism and find that the unit production costs in different periods may have contrary effects on the bounds of Pareto range.

Keywords

Advertising Investment, Supply Chain Management, Markdown Money-Cooperative Advertising Contract, Reorder, Game Theory

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	D. Simchi-Levi, P. Kaminsky and E. Simchi-Levi, “De- signing & Managing Supply Chain: Concepts, Strategy & Case Studies,” McGraw-Hill, Irwin, 2003, pp. 76-90.
[2]	S. J?rgensen, S. P. Sigué and G. Zaccour, “Dynamic Cooperative Advertising in a Channel,” Journal of Retailing, New York, Vol. 76, No. 1, 2000, pp. 71-92.
[3]	Z. Huang and S. X. Li, “Co-op Advertising Models in Manufacturer-Retailer Supply Chains: A Game Theory Approach,” European Journal of Operational Research, Elsevier, Vol. 135, No. 3, December 2001, pp. 527-544.
[4]	M. G. Nagler, “An Exploratory Analysis of the Deter- minants of Cooperative Advertising Participation Rates,” Marketing Letters, Springer Netherlands, Vol. 17, No. 2, April 2006, pp. 91-102.
[5]	H. S. Lau and A. H. L. Lau, “Manufacturer’s Pricing Strategy and Return Policy for a Single-Period Com- modity,” European Journal of Operation Research, Elsevier, Vol. 116, No. 2, July 1999, pp. 291-304.
[6]	T. A. Taylor, “Supply Chain Coordination under Channel Rebates with Sales Effort Effects,” Management Science, INFORMS, Vol. 48, No. 8, August 2002, pp. 992-1007.
[7]	C. X. Wang and S. Webster, “Markdown Money Con- tracts for Perishable Goods with Clearance Pricing,” European Journal of Operational Research, Elsevier, Vol. 196, No. 3, August 2009, pp. 1113-1122.
[8]	Z. Yao, S. C. H. Leung and K. K. Lai, “Manufacturer’s Revenue-Sharing Contract and Retail Competition,” European Journal of Operational Research, Elsevier, Vol. 186, No. 2, April 2008, pp. 637-651.
[9]	N. X. Xu and L. Nozick, “Modeling Supplier Selection and the Use of Option Contracts for Global Supply Chain Design,” Computers & Operations Research, Elsevier, Vol. 36, No. 10, October 2009, pp. 2786-2800.
[10]	K. L. Donohue, “Efficient Supply Contracts for Fashion Goods with Forecast Updating and Two Production Modes,” Management Science, INFORMS, Vol. 46, No. 11, November 2000, pp. 1397-1411.
[11]	X. H. Zhang, J. H. Ou and S. M. Gilbert, “Coordination of Stocking Decisions in an Assemble-to-Order Environ- ment,” European Journal of Operational Research, Elsevier, Vol. 189, No. 2, September 2008, pp. 540-558.
[12]	C. C. Hsieh, C. H. Wu and Y. J. Huang, “Ordering and Pricing Decisions in a Two-Echelon Supply Chain with Asymmetric Demand Information,” European Journal of Operational Research, Elsevier, Vol. 190, No. 2, October 2008, pp. 509-525.
[13]	E. Kandel, “The Right to Return,” Journal of Law and Economics, University of Chicago, Vol. 39, April 1996, pp. 329-356.
[14]	J. He, K. S. Chin, J. B. Yang and D. L. Zhu, “Return Policy Model of Supply Chain Management for Single- Period Products,” Journal of Optimization Theory and Applications, Springer Netherlands, Vol. 129, No. 2, May 2006, pp. 293-308.
[15]	A. Nair and D. J. Closs, “An Examination of the Impact of Coordinating Supply Chain Policies and Price Markdowns on Short Lifecycle Product Retail Perfor- mance,” International Journal of Production Economics, Elsevier, Vol. 102, No. 2, August 2006, pp. 379-392.
[16]	H. P. Marvel and H. Wang, “Inventories, Return Policy, and Equilibrium Price Dispersion under Demand Uncertainty,” China Center for Economic Research, Beijing University, Working Paper, 2002.
[17]	K. Kogan and A. Herbon, “A Supply Chain under Limited-Time Promotion: The Effect of Customer Sensitivity,” European Journal of Operational Research, Elsevier, Vol. 188, No. 1, July 2008, pp. 273-292.
[18]	Y. J. He and J. Zhang, “Random Yield Risk Sharing in a Two-Level Supply Chain,” International Journal of Production Economics, Elsevier, Vol. 112, No. 2, April 2008, pp. 769-781.
[19]	C. H. Lee and B. D. Rhee, “Channel Coordination Using Product Returns for a Supply Chain with Stochastic Salvage Capacity,” European Journal of Operational Research, Elsevier, Vol. 177, No. 1, February 2007, pp. 214-238.
[20]	Z. K. Weng, “Coordinating Order Quantities between the Manufacturer and the Buyer: A Generalized Newsvendor Model,” European Journal of Operational Research, Elsevier, Vol. 156, No. 1, July 2004, pp. 148-161.
[21]	F. Chen, “Echelon Reorder Points, Installation Reorder Points, and the Value of Centralized Demand Information,” Management Science, INFORMS, Vol. 44, No. 12, December 1998, pp. S221-S234.
[22]	Y. Seo, S. Jung and J. Hahm, “Optimal Reorder Decision Utilizing Centralized Stock Information in a Two-Echelon Distribution System,” Computers & Operations Research, Elsevier, Vol. 29, No. 2, February 2002, pp. 171-193.
[23]	M. K. Dogru, G. J. Houtum and A. G. Kok, “Newsvendor Equations for Optimal Reorder Levels of Serial Inventory Systems with Fixed Batch Sizes,” Operations Research Letters, Elsevier, Vol. 36, No. 5, September 2008, pp. 551-556.
[24]	M. Leng and M. Parlar, “Lead-Time Reduction in a Two-Level Supply Chain: Non-Cooperative Equilibria vs. Coordination with a Profit-sharing Contract,” Interna- tional Journal of Production Economics, Elsevier, Vol. 118, No. 2, April 2009, pp. 521-544.
[25]	Y. Seo, “Controlling General Multi-Echelon Distribution Supply Chain with Improved Reorder Decision Policy Utilizing Real-Time Shared Stock Information,” Computers & Industrial Engineering, Elsevier, Vol. 51, No. 2, October 2006, pp. 229-246.
[26]	T. J. Xiao and X. X. Yan, “Coordinating a Two-Stage Supply Chain via a Markdown Money and Advertising Subsidy Contract,” International Journal of Information and Decision Sciences, Inderscience, 2010, in press.
[27]	F. J. Arcelus, S. Kumar and G. Srinivasan, “Evaluating Manufacturer’s Buyback Policies in a Single-Period Two- Echelon Framework under Price-Dependent Stochastic Demand,” Omega, Elsevier, Vol. 36, No. 5, October 2008, pp. 808-824.