Title: The effect of margin guarantees on pricing and production

Authors: Timothy L. Urban

Addresses: Operations Management, The University of Tulsa, Tulsa, Oklahoma 74104-3189, USA

Abstract: The modelling of supply contracts has recently received a considerable amount of attention in the supply-chain literature. A |guarantee of margins| is a form of supply contract that reflects the recent shift of power from manufacturers to retailers in several industries. These agreements ensure a certain profit margin for the retailer even if markdowns are required to move the product. Very little research, however, has been conducted on this specific type of supply contract. Thus, a single-period, two-echelon pricing/inventory model is developed to analyse profit margin guarantees. We show that a guarantee of margins can improve the expected channel profit, as long as the margin is not set at too high a level and that the customers may benefit as well, through higher output and lower prices.

Keywords: supply contracts; guaranteed profit margins; value chain management; supply chain management; SCM; two-echelon pricing-inventory model.

DOI: 10.1504/IJMTM.2007.013755

International Journal of Manufacturing Technology and Management, 2007 Vol.12 No.4, pp.314 - 326

Published online: 25 May 2007 *

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