An ordering model with cooperating mechanism and substitute compensation policy in a three echelon supply chain

Abstract

Recently, business cases are observed more frequently where higher quality (also, higher-priced) products are sold earlier than its similar products. In the meantime, cooperating mechanism such as revenue-sharing contract is usually applied to facilitate retailers to buy more higher quality products by lowering selling price to the retailers to maximize overall supply chain profit. This study constructs an optimal model with the goal to maximize supply chain profit under product upward substitution and revenue sharing mechanisms to determine the optimal mix of ordering quantities of two products, compensating amount, and revenue sharing ratio. One real-life case are used to validate the models developed. The results show that compensating mechanism is able to motivate customers to accept the lower-quality product and to make retailers' profit higher. And, revenue sharing contract can push retailers to buy more high quality products to make the manufacturer's profit and supply chain profit higher.