Production allocation decision using revenue sharing contract with prior commitments and two-way penalties

Muhammad Shafiq and Huynh Trung Luong

International Journal of Industrial and Systems Engineering, 2017, vol. 26, issue 2, 247-274

Abstract: In this paper, we propose a revenue-sharing contract with prior-commitments and two-way penalties to facilitate the manufacturer in capacity allocation decisions for a supply chain facing uncertain demand. To motivate the manufacturer to allocate enough capacity, the proposed contract induces the retailers to share capacity investment risk of the manufacturer by making prior commitments about order quantities. The inclusion of under-purchase and over-purchase penalties ensures that the commitment level of each retailer is not too low or too high. Under-supply penalty is also introduced to ensure product availability during selling season and also to compensate the shortage loss of the retailers if manufacturer fails to supply committed quantity. The study also examines quantity allocation trend of the manufacturer at various levels of commitments from the retailers using numerical analyses. Furthermore, coordination performance of the proposed contract is examined at various levels of commitments, revenue sharing percentages, and demand correlation.

Keywords: supply chain management; revenue sharing contract; supply chain coordination; commitment-penalty; quantity reallocation; two-way penalties. (search for similar items in EconPapers)
Date: 2017
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