Two-level supply chain quality improvement through a wholesale price coordination contract on pricing, quality and services

Abstract

Nowadays, competitive market creates the necessity of quality improvement in different levels of supply chains (SCs). This paper contributes to the SC coordination literature and proposes a bilateral coordination contract for optimizing pricing decisions along with quality improvement decisions in different echelons of a real case of a cell phone SC. The SC comprises a manufacturer who deals with determining the product quality, and a retailer who seeks for the optimal strategy on price, after-sale service and service level in a periodic review inventory system. The proposed bilateral wholesale price (BWP) contract is shown to be capable of simultaneous coordination of these decisions. The sensitivity analysis showed that in a market which is sensitive to quality and after-sale service as well as the product price, the proposed model facilitates investing more in such quality improvements while the members’ profitability with respect to the case without contracts is guaranteed. Moreover, it can increase the SC service level since it enables the members to hold more safety stock even under high inventory costs. Overall, the proposed coordination model on pricing, product quality, after-sale service and service level, leads to the optimal performance of the SC and its members while it is beneficial for the customers.

Keywords

• quality improvement
• supply chain coordination
• pricing
• service
• periodic review inventory system
• bilateral wholesale price contract.