Advance Purchase Discounts for Supply Chain Finance System Coordination

Roberta Pellegrino, Nicola Costantino and Danilo Tauro
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Roberta Pellegrino: Departments of Mechanics, Mathematics and Management, Politecnico di Bari, via Orabona 4, 70126 Bari, Italy
Nicola Costantino: Departments of Mechanics, Mathematics and Management, Politecnico di Bari, via Orabona 4, 70126 Bari, Italy
Danilo Tauro: Departments of Mechanics, Mathematics and Management, Politecnico di Bari, via Orabona 4, 70126 Bari, Italy

Sustainability, 2020, vol. 12, issue 23, 1-20

Abstract: The purpose of this paper is to study how advanced information about customer needs obtained through an Advance Purchase Discount (APD) contract can be exploited to coordinate the capital flow and enhance the efficiency of a two-stage supply chain (SC) under decentralized control in cases of stochastic customer demand. We developed an APD model in the form of an option contract, where the model and evaluation include the flexibility for the upstream firm to decide whether to provide a discount for an advance purchase at its own discretion. Applying the model to a Fortune 100 company, a leader in the Fast Mover Consumer Goods (FMCG) industry, showed that under certain conditions, and with suitably chosen contract parameters, management of decentralized control via APD contracts can lead to system-wide efficiency, and the individual decision makers pursue their own best interests, ensuring a win-win condition.

Keywords: supply chain finance; supply chain coordination; supply contracts; advance purchase discount; option contract (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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