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Contracting in a newsvendor problem

Jing Chen (Department of Business Administration, University of Winnipeg, Winnipeg, Canada)

Journal of Modelling in Management

ISSN: 1746-5664

Article publication date: 26 October 2012

Abstract

Purpose

Contracting is an important issue in supply chain management. In this paper, the authors aim to discuss and compare the manufacturer's contracting options when the retailer faces a traditional newsvendor problem with a fixed retail price: a wholesale price only contract, a wholesale price discount contract, a returns policy contract, and a returns policy with the wholesale price discount contract. The paper also aims to examine how these contracting options affect decisions of the manufacturer and the retailer, as well as the supply chain efficiency.

Design/methodology/approach

Models are developed based on the manufacturer's four contracting options. The manufacturer's optimal wholesale prices have been obtained. The ordering decisions of the retailer are discussed in each of the manufacturer's four contracting options. The paper also uses numerical examples to illustrate the author's managerial insights and results.

Findings

As compared to the wholesale price only contract, it is found that implementing a wholesale price discount policy effectively encourages the retailer to order more product and enhances the retailer's profit at the expense of lowering the manufacturer's profit. It is also found that when the manufacturer offers a returns policy and if this policy cannot enhance the retailer's profit, a returns policy with the wholesale price discount contract can lead to a win‐win situation for both the manufacturer and the retailer.

Originality/value

The research provides managerial insights on how different contracts affect decisions and efficiency of the supply chain.

Keywords

Citation

Chen, J. (2012), "Contracting in a newsvendor problem", Journal of Modelling in Management, Vol. 7 No. 3, pp. 242-256. https://doi.org/10.1108/17465661211283250

Publisher

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Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited