A surcharge pricing policy for supply chain coordination under the just-in-time (JIT) environment in the presence of backordering

In the just-in-time (JIT) manufacturing system, the vendors ship in small batch sizes. Hence the buyers are at an advantageous position as they can reduce their inventory holding costs. The practice of shipping in smaller batch sizes often results in the vendors incurring high costs as the number of production setups and the number of shipments increases for the vendors. The vendors could only switch to JIT mode when there is an assurance from the buyer of providing some compensation for the increased costs. This compensation from the buyer to the vendors is called ‘surcharge price’. In our work, we have studied the surcharge pricing mechanism in the presence of backorder when there is a powerful vendor and have shown that the it can coordinate a decentralized supply chain. Our study incorporates both the cases of the buyer holding full information about the vendors’ costs as well as the case of information asymmetry. In the case of full information, we have shown that the optimal order quantity in the presence of surcharge pricing is less than that of the vendor dominated scenario. At the same time, the optimal order quantity is higher than that in the buyer dominated scenario. Further, the total supply chain costs are also minimized when a surcharge pricing contract is offered in comparison to both the buyer and the vendor dominated scenarios. For the information asymmetry case, we have framed the optimal set of screening contracts and have shown that an optimal surcharge pricing contract to the vendor is free from the probability distribution of the vendor type.