The use of Revenue-sharing Contracts in Two-level Supply Chain Coordination with the Presence of Vendor-managed Inventory and Advertising Investment

Document Type : Research Paper

Authors

1 MSc. Student, Department of Industrial Engineering, School of Industrial Engineering, Iran University of Science & Technology, Tehran, Iran.

2 Associate Prof., Department of Industrial Engineering, School of Industrial Engineering, Iran University of Science & Technology, Tehran, Iran.

3 Ph.D. Candidate, Department of Industrial Engineering, School of Industrial Engineering, Iran University of Science & Technology, Tehran, Iran.

Abstract

Objective
Implementing the "Vendor-Managed Inventory" strategy and sharing inventory information among retailers and manufacturers play crucial roles in reducing holding costs, shortage costs, transportation costs, and excess inventory costs. This leads to enhanced coordination in the decision-making processes of supply chain members. Therefore, this research delves into the investigation of the supply chain coordination mechanism by combining the vendor-managed inventory strategy and revenue-sharing contracts. Additionally, in the developed model, the demand function incorporates a multiplicative factor of elements influencing the profit function, such as retail price, retailer, and manufacturer advertising investments.
 
Methods
In this article, we study the coordination in a two-level supply chain including one manufacturer and multiple retailers under a revenue-sharing contract, where the pricing and advertising investment strategy of each member of the supply chain is implemented despite vendor-managed inventory in a centralized supply chain. Subsequently, in the decentralized state, we employ the Stackelberg game with manufacturer leadership to determine the optimal variables for both manufacturers and retailers. Finally, to reach coordination and achieve the maximum benefit of the supply chain, we proposed a revenue-sharing contract so that the retailer compensates a part of the costs incurred by the manufacturer by sharing a proportion of the revenue.
 
Results
A numerical example is presented to show the implementation impact of the revenue-sharing contract on the profit of the chain members. Costs and profit functions are calculated in the Iranian Rial and this system is planned for one year. In this example, it is clear that this contract has been worked successfully and the profit of the supply chain in the coordinated state is equal to the profit under the centralized state. The sensitivity analysis of the model showed that the profit of each member of the chain in a coordinated state is more than their profit in a decentralized state. In addition, advertising investment increases the profits of manufacturers and retailers significantly. As a managerial insight, it is recommended that both levels of the chain place special emphasis on investing in advertising activities.
 
Conclusion
This research was conceived based on a real-world scenario, where a single manufacturer engages with multiple retailers within a market. The findings of this study have broad applicability across various retail industries, including but not limited to fruit and vegetable markets, grocery stores, protein supply chain outlets, health and beauty product suppliers, drugstores, pharmaceutical supply chains, as well as industries such as automotive and petrochemical. The results of this research proved that the vendor-managed inventory strategy increases the interaction between manufacturers and retailers and helps manufacturers access the retailer information to charge products as soon as possible and also avoid excess production.

Keywords

Main Subjects


 
Allameh, G., Esmaeili, M., & Tajvidi, T. (2014). Developing several pricing models in green supply chain under risk by Game Theory Approach. Industrial Management Journal6(4), 767-789. (in Persian)
Ben-Daya, M., Darwish, M., & Ertogral, K. (2008). The joint economic lot sizing problem: Review and extensions. European Journal of Operational Research185(2), 726-742.
Cachon, G. P., & Lariviere, M. A. (2001). Contracting to assure supply: How to share demand forecasts in a supply chain. Management science, 47(5), 629-646.
Cachon, G. P., & Lariviere, M. A. (2005). Supply chain coordination with revenue-sharing contracts: strengths and limitations. Management science, 51(1), 30-44.
Cai, J., Hu, X., Tadikamalla, P. R., & Shang, J. (2017). Flexible contract design for VMI supply chain with service-sensitive demand: Revenue-sharing and supplier subsidy. European Journal of Operational Research, 261(1), 143-153.
Chen, J. M., Cheng, H. L., & Chien, M. C. (2011). On channel coordination through revenue-sharing contracts with price and shelf-space dependent demand. Applied Mathematical Modelling35(10), 4886-4901.
De Giovanni, P. (2021). Smart Supply Chains with vendor managed inventory, coordination, and environmental performance. European Journal of Operational Research, 292(2), 515-531.
Einy - Sarkalleh, G., Hafezalkotob, A., Tavakkoli - Moghaddam, R. & Najafi, E. (2022). Identifying the Main Obstacles to Carrying Outbi-directional Contracts in Supply Chains by Adopting the Best-worst Method and Undertaking Weighted Aggregates Sum Product Assessment: A Fuzzy Approach. Industrial Management Journal, 14(2), 310-336.
(in Persian)
Gharaei, A., Karimi, M., & Shekarabi, S. A. H. (2019). An integrated multi-product, multi-buyer supply chain under penalty, green, and quality control polices and a vendor managed inventory with consignment stock agreement: The outer approximation with equality relaxation and augmented penalty algorithm. Applied Mathematical Modelling, 69, 223-254.
Haji, R., Moarefdoost M.M. & Ebrahimi, B. (2009). Finding the cost of inventory in make to order supply chain under vendor managed inventory program. Industrial Management Journal, 1(3), 21-36. (in Persian)
Hariga, M., As’ad, R., & Ben-Daya, M. (2023). A Single-Vendor Multi-Retailer VMI Partnership under Individual Carbon-Cap Constraints. IEEE Access.
Hematyar, S., Chaharsooghi, K. & Nakhaei, I. (2014). Two-level Supply Chain Coordination by Using an Insurance Contract under Returning Goods from Customer and Two-periodic Demand. Industrial Management Journal, 6(2), 411-432. (in Persian)
Heydari, J., Govindan, K., & Sadeghi, R. (2018). Reverse supply chain coordination under stochastic remanufacturing capacity. International Journal of Production Economics, 202, 1-11.
Huang, Z., & Li, S. X. (2001). Co-op advertising models in manufacturer–retailer supply chains: A game theory approach. European journal of operational research, 135(3), 527-544.
Huiskonen, J., & Pirttilä, T. (2002). Lateral coordination in a logistics outsourcing relationship. International Journal of Production Economics, 78(2), 177-185.
Husseinzadeh Kashan, A., & Sardashti, T. (2023). Optimal Pricing, Warranty, and Quality Level Decisions in a Competing Dual-channel Supply Chain. Industrial Management Journal, 15(1), 65-91. (in Persian)
Jia, J., Letizia, P., & Willems, S. P. (2022). Supply chain coordination with information design. Decision Sciences.
Karimi, M., Khademi-Zare, H., Zare-Mehrjerdi, Y., & Fakhrzad, M. B. (2022). Optimizing service level, price, and inventory decisions for a supply chain with retailers’ competition and cooperation under VMI strategy. RAIRO-Operations Research, 56(2), 1051-1078.
Kiesmüller, G. P., & Broekmeulen, R. A. C. M. (2010). The benefit of VMI strategies in a stochastic multi-product serial two echelon system. Computers & Operations Research, 37(2), 406-416.
Kwong, C. K., Xia, Y., Chan, C. Y., & Ip, W. H. (2021). Incorporating contracts with retailer into product line extension using Stackelberg game and nested bi-level genetic algorithms. Computers & Industrial Engineering, 151, 106976.
Lan, C., & Yu, X. (2022). Revenue sharing-commission coordination contract for community group buying supply chain considering promotion effort. Alexandria Engineering Journal, 61(4), 2739-2748.
Lee, H. L., So, K. C., & Tang, C. S. (2000). The value of information sharing in a two-level supply chain. Management science, 46(5), 626-643.
Linh, C. T., & Hong, Y. (2009). Channel coordination through a revenue sharing contract in a two-period newsboy problem. European Journal of Operational Research, 198(3), 822-829.
Malone, T. W., & Crowston, K. (1994). The interdisciplinary study of coordination. ACM Computing Surveys (CSUR), 26(1), 87-119.
Martinez-de-Albeniz, V., & Simchi-Levi, D. (2009). Competition in the supply option market. Operations Research, 57(5), 1082-1097.
Modares, A., Farimani, N. M., & Emroozi, V. B. (2023). A vendor-managed inventory model based on optimal retailers selection and reliability of supply chain. Journal of Industrial and Management Optimization19(5), 3075-3106.
Mohammadi, M. & Gholamian, M.R. (2023). Stackelberg Game Theory Model with Price and Shelf Space Dependent Demand under Revenue Sharing Contract. Industrial management Studies, 21(68), 1-34. (in Persian)
Mohammadi, T., Sajadi, S. M., Najafi, S. E., & Taghizadeh Yazdi, M. (2022). Optimizing Smart Supply Chain with Vendor Managed Inventory through the Internet of Things. Industrial Management Journal, 14(3), 458-483. (in Persian)
Omar, I. A., Jayaraman, R., Salah, K., Debe, M., & Omar, M. (2020). Enhancing vendor managed inventory supply chain operations using blockchain smart contracts. IEEE Access, 8, 182704-182719.
Qin, Z., & Yang, J. (2008). Analysis of a revenue-sharing contract in supply chain management. International Journal of Logistics: Research and Applications, 11(1), 17-29.
Sainathan, A., & Groenevelt, H. (2019). Vendor managed inventory contracts–coordinating the supply chain while looking from the vendor’s perspective. European Journal of Operational Research, 272(1), 249-260.
Sha, J., & Zheng, S. (2023). Analysis of Sub-Optimization Impact on Partner Selection in VMI. Sustainability, 15(3), 2742.
Taleizadeh, A. A., Shokr, I., Konstantaras, I., & VafaeiNejad, M. (2020). Stock replenishment policies for a vendor-managed inventory in a retailing system. Journal of Retailing and Consumer Services55, 102137.
Wang, D., Wang, Z., Zhang, B., & Zhu, L. (2022). Vendor-managed inventory supply chain coordination based on commitment-penalty contracts with bilateral asymmetric information. Enterprise Information Systems, 16(3), 508-525.
Weißhuhn, S., & Hoberg, K. (2021). Designing smart replenishment systems: Internet-of-Things technology for vendor-managed inventory at end consumers. European Journal of Operational Research, 295(3), 949-964.
Wu, D., Chen, J., Li, P., & Zhang, R. (2020). Contract coordination of dual channel reverse supply chain considering service level. Journal of Cleaner Production, 260, 121071.
Wu, H., Han, X., Yang, Q., & Pu, X. (2018). Production and coordination decisions in a closed-loop supply chain with remanufacturing cost disruptions when retailers compete. Journal of Intelligent Manufacturing, 29(1), 227-235.
Xiao, T., Yu, G., Sheng, Z., & Xia, Y. (2005). Coordination of a supply chain with one-manufacturer and two-retailers under demand promotion and disruption management decisions. Annals of Operations Research, 135(1), 87-109.
Yu, Y., & Huang, G. Q. (2010). Nash game model for optimizing market strategies, configuration of platform products in a Vendor Managed Inventory (VMI) supply chain for a product family. European Journal of Operational Research, 206(2), 361-373.
Yu, Y., Huang, G.Q. & Liang, L. (2009). Stackelberg game-theoretic model for optimizing advertising, pricing and inventory policies in vendor managed inventory (VMI) production supply chains. Computers & Industrial Engineering, 57(1), 368-382.
Zegordi, S. H., & Shahidi, S. A. (2022). Beef Supply Chain Analysis Based on Carbon Emission Costs, under Revenue-sharing and Cost-sharing Contracts. Industrial Management Journal14(4), 618-637. (in Persian)
Zhu, X., Xie, L., Lin, G., & Ma, X. (2022). Decision analysis of individual supplier in a vendor-managed inventory program with revenue-sharing contract. International Journal of Industrial Engineering Computations, 13(3), 405-420.