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Incentives to improve the service level in a random yield supply chain: The role of bonus contracts

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  • Yin, Zhe
  • Ma, Shihua

Abstract

We consider a decentralized supply chain comprised of one manufacturer and one retailer where the manufacturer has random yield, and the retailer faces uncertain demand. To guarantee product availability, the retailer requires a service level of the product supply from the manufacturer. However, we determine that the high service level indeed benefits the retailer whereas causes the manufacturer’s profit loss. Therefore, to promote the high-service-level cooperation, the retailer has to provide incentives for the manufacturer, such as bonuses. We consider two common bonus contracts: unit bonus and flat (or lump-sum) bonus. The primary question we address is whether the service-level based bonus contracts can achieve the two firms’ Pareto-improving for both service level and profits, which is a prerequisite for the retailer to carry out them with the manufacturer. The results show that both bonus contracts can achieve Pareto-improving. While it is simpler for the retailer to carry out the unit bonus contract, the retailer can achieve a higher service level and higher profits under the flat bonus contract.

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  • Yin, Zhe & Ma, Shihua, 2015. "Incentives to improve the service level in a random yield supply chain: The role of bonus contracts," European Journal of Operational Research, Elsevier, vol. 244(3), pages 778-791.
    • Handle: RePEc:eee:ejores:v:244:y:2015:i:3:p:778-791
    DOI: 10.1016/j.ejor.2015.02.006
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    2. Sarah Parlane & Ying-Yi Tsai, 2017. "Optimal Management of Supply Disruptions when Contracting with Unreliable, Risk-averse, Suppliers," Working Papers 201714, School of Economics, University College Dublin.
    3. B.C. Giri & S. Bardhan & T. Maiti, 2016. "Coordinating a three-layer supply chain with uncertain demand and random yield," International Journal of Production Research, Taylor & Francis Journals, vol. 54(8), pages 2499-2518, April.
    4. Asl-Najafi, Javad & Yaghoubi, Saeed & Zand, Fatemeh, 2021. "Dual-channel supply chain coordination considering targeted capacity allocation under uncertainty," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 187(C), pages 566-585.
    5. Zare, Marjan & Esmaeili, Maryam & He, Yuanjie, 2019. "Implications of risk-sharing strategies on supply chains with multiple retailers and under random yield," International Journal of Production Economics, Elsevier, vol. 216(C), pages 413-424.
    6. Hannan Amoozad Mahdiraji & Aliasghar Abbasi Kamardi & Moein Beheshti & Seyed Hossein Razavi Hajiagha & Luis Rocha-Lona, 2022. "Analysing supply chain coordination mechanisms dealing with repurposing challenges during Covid-19 pandemic in an emerging economy: a multi-layer decision making approach," Operations Management Research, Springer, vol. 15(3), pages 1341-1360, December.
    7. Jain, Tarun & Hazra, Jishnu, 2017. "Sourcing strategies under agglomeration economies, capacity risks and retail competition," International Journal of Production Economics, Elsevier, vol. 191(C), pages 311-322.
    8. Sule Birim & Cigdem Sofyalioglu, 2017. "Evaluating vendor managed inventory systems: how incentives can benefit supply chain partners," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 18(1), pages 163-179, January.
    9. Bo He & Guo Li & Mengqi Liu, 2018. "Impacts of decision sequences on a random yield supply chain with a service level requirement," Annals of Operations Research, Springer, vol. 268(1), pages 469-495, September.
    10. Wang, Yulan & Wallace, Stein W. & Shen, Bin & Choi, Tsan-Ming, 2015. "Service supply chain management: A review of operational models," European Journal of Operational Research, Elsevier, vol. 247(3), pages 685-698.
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