Title: Analysis of a flexible commitment contract with two-way penalties

Authors: Nguyen Thi Xuan Hoa; Huynh Trung Luong

Addresses: Industrial Systems Engineering, Asian Institute of Technology, Klong Luang, Pathumthani, Postal code: 12120, Thailand ' Industrial Systems Engineering, Asian Institute of Technology, Klong Luang, Pathumthani, Postal code: 12120, Thailand

Abstract: In this paper, we develop a flexible commitment (FC) contract model - a hybrid contract between quantity flexibility contract and commitment contract with penalties applied to a supplier and a retailer in the supply chain. In the proposed contract, three types of penalty, namely, under purchase, over purchase and under supply penalties are applied to either the supplier or the retailer. For the proposed contract, we firstly determine the profit functions of the supplier and the retailer, and then analyse the optimal reserved supply quantity of the supplier at a given commitment level of the retailer, as well as the optimal commitment quantity of the retailer given information about the reserved supply quantity being known. Guidelines for the supplier to decide on reserved supply quantity and the retailer to decide on commitment quantity are then examined through scenario analysis. Supply chain coordination and contract efficiency are also examined through numerical analysis.

Keywords: flexible commitment; penalties; supply chain coordination; quantity flexibility; capacity commitment; supply chain efficiency.

DOI: 10.1504/IJISE.2017.085757

International Journal of Industrial and Systems Engineering, 2017 Vol.27 No.1, pp.122 - 160

Received: 09 Jun 2015
Accepted: 28 Aug 2015

Published online: 12 Aug 2017 *

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