Coordinating a supply chain with a quality assurance policy via a revenue-sharing contract

Abstract

This paper explores coordination of a (global) supply chain consisting of one manufacturer and one retailer via a revenue-sharing contract, where a product quality assurance policy is provided and the utility of consumer is sensitive to product (physical) quality, service quality (i.e., reciprocal of delivery lead-time) and retail price. We assume that the supply chain operates in a make-to-order (MTO) environment and a defective product is returned to the manufacturer for remanufacturing free. We give the optimal service quality and pricing decisions of the decentralised supply chain, its coordination mechanism and the Pareto condition of coordination mechanism. In the decentralised setting, although a higher defective rate of the final product implies a higher cost for the manufacturer, the optimal service quality first decreases and then increases and the optimal retail price decreases as the defective rate increases, which differs from the effects of the unit remanufacturing cost due to the service reliability constraint and the effects of the defective rate on the market scale and lead-time sensitivity; when the supply chain is coordinated, comparing to the traditional models without considering service quality, the manufacturer charges the retailer a higher unit wholesale price. The effect of the defective rate on the Pareto range of coordination mechanism is inconsistent with that of the unit production cost because the defective rate directly influences the demand rate.

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