Rewards-supply planning under option contracts in managing coalition loyalty programmes

Yuheng Cao, Aaron L. Nsakanda, Moustapha Diaby and Michael J. Armstrong

International Journal of Production Research, 2015, vol. 53, issue 22, 6772-6786

Abstract: We examine the problem of planning the supply of rewards in coalition loyalty programmes considering that the buyer–supplier relationships with commercial partners are governed by option contracts rather than wholesale price contracts similar to what is commonly used in practice. We develop a two-stage stochastic linear programme model with simple recourse which considers uncertain demand requirements, limited reward purchasing budgets, multiple programme partners of various sizes, point-liability control targets and overall profitability. A sampling average approximation scheme is used to solve the model. Numerical experiments show that option contracts perform better than wholesale price contracts when redemption demand uncertainty is high and the number of redemption partners is large. The results also suggest that the common practice of increasing redemption capacities is not the most effective way to cope with demand uncertainties. Programmes that reduce redemption demand variability and/or create better contracting structures are more promising in improving points-liability, redemption budget spending and overall profitability than traditional approaches.

Date: 2015
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DOI: 10.1080/00207543.2015.1059519

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