Proposing a discount policy for two-level supply chain coordination with periodic review replenishment and promotional efforts decisions

This study develops a coordination scheme based upon discount contract to coordinate promotional efforts and periodic review replenishment decisions. We consider a supplier-retailer chain with stochastic demand dependent on promotional efforts. The retailer uses a periodic review order-up-to-level inventory system and makes promotional efforts as a means of enhancing market demand. In traditional trading market, the retailer individually determines the replenishment and promotional efforts decisions based upon his/her own profitability. However, these decisions affect the sales volume of the whole system and consequently influence the supplier’s profitability. Therefore, it is worth devising a coordination plan that not only enhances the entire system’s profitability but also brings great benefits to both the retailer and the supplier. To this end, we first propose a decentralized model where each member’s profit function is optimized regardless of the others’ profitability. Then, a centralized model is investigated to achieve the best values of replenishment and promotional efforts decisions from the whole supply chain viewpoint. Afterwards, an incentive plan based upon a discount factor is developed to guarantee the members’ participation in the coordination plan. Upper and lower limits of the discount factor are derived based upon the members’ conditions for taking part in the plan. Moreover, we propose an industrial case study and a comprehensive sensitivity analysis. The outcomes of the model indicate that the proposed coordination scheme is effective and desirable even when the level of demand uncertainty increases.