Profit-sharing mechanisms for the production-distribution alliance

Abstract

Profit-sharing is one of the most important coordinating mechanisms for successful operating a production-distribution alliance. This paper provides the alliance with single producer and multi-distributor two profit-sharing mechanisms: (1) the cost-based mechanism and (2) the efficiency-based mechanism. Operating costs for each member in the alliance can be obtained by robust accounting system. Average operating efficiency among members in the alliance can be measured by using the standard data envelopment analysis (DEA) model. The cost-based mechanism is advantageous to the manufacturer who having huge cost in their facilities. In contrast, the efficiency-based mechanism, in which more cost brings lower efficiency, is disadvantageous to the manufacturer. The cost-based mechanism is instinctive, but it is less helpful than efficiency-based mechanism in cost down efforts for continuous improvement. The proposed mechanisms are illustrated with a numerical example.