Title: Coordinating manufacturer and retailer using a novel robust discount scheme

Authors: Mohammad Mohajer Tabrizi; Hamidreza Navidi; Ali Salmasnia; Cyrus Mohebbi

Addresses: Department of Industrial Engineering, Amirkabir University of Technology, 424 Hafez Ave., P.O. Box 15875-4413, Tehran, Iran. ' Department of Mathematics, Shahed University, P.O. Box 18155/159, Tehran, Iran. ' Tarbiat Modares University, Jalal Ale Ahmad Highway, P.O. Box: 14115-111, Tehran, Iran. ' Morgan Stanley, 2000 Westchester Avenue, Purchase, NY 10577, USA; Columbia University, 116th Street and Broadway, New York, NY 10027, USA

Abstract: Buffer management (BM) is an inventory management methodology introduced by theory of constraints (TOC). In this practice, the retailer passes his demands to the vendor in 'almost a daily manner' and has a 'dynamic inventory buffer' that reflects the change in demand patterns allowing the vendor the opportunity to replenish his inventory and obtain some market information. In this paper, we consider a supply chain consisting of a manufacturer and a retailer for which both are implementing the BM. We discuss how the vendor and the retailer can take advantage of demand information created by BM, through a process of bargaining, to coordinate their supply chain and increase their profitability. To do so, we have simulated the BM process and used response surface methodology (RSM) to obtain each party's profit function. Then, their equilibrium state strategies are developed using the Nash arbitration scheme. In addition, we propose a method to obtain a robust strategy against variations in uncontrollable factors for both the manufacturer and the retailer. Moreover, we show that this equilibrium can be further improved if both parties are willing to cooperate through side payment contracts. A numerical example and the corresponding sensitivity analysis are presented to illustrate the results.

Keywords: supply chain management; SCM; theory of constraints; TOC; simulation; price discount; game theory; response surface methodology; RSM; buffer management; inventory management.

DOI: 10.1504/IJADS.2012.047670

International Journal of Applied Decision Sciences, 2012 Vol.5 No.3, pp.253 - 271

Published online: 09 Aug 2014 *

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