Coordinating contracts for VMI systems under manufacturer-CSR and retailer-marketing efforts

Abstract

This paper studies the coordination of a two-echelon consignment channel in vendor managed inventory systems. The market demand is affected by retailer s marketing effort, retail price, manufacturer s CSR (Corporate Social Responsibility) effort and the changes in economic and business conditions. We propose four contracts that combine revenue and cost sharing to effectively coordinate the channel members which are referred to as “revenue and production cost sharing”; “revenue, production cost and marketing cost sharing”; “revenue, production cost and CSR cost sharing” and “revenue, production cost, marketing cost and CSR cost sharing”. Each contract is represented by a fraction of sharing (α). In the deterministic demand, our analysis show that these sharing contracts lead to Pareto improvements in comparison with the wholesale price contract for some ranges of α values. Furthermore, we found that the first three contracts cannot coordinate the channel while the last contract leads to a perfect coordination of the channel. In the stochastic demand, numerical examples show that the sharing contracts where retailer shares the production cost of all consigned stocks always lead to Pareto improvements and the channel can be perfectly coordinated if the channel members share all of the costs. In contrast, the Pareto improvements may not always be achieved with sharing contracts where retailer shares the production cost of sold stocks and none of them can coordinate the channel. From managerial insights, our research could help channel managers to improve the CSR implementation as well as the channel performance in the short and long term.