The use of Revenue-sharing Contracts in Two-level Supply Chain Coordination with the Presence of Vendor-managed Inventory and Advertising Investment

Abstract

ObjectiveImplementing the "Vendor-Managed Inventory" strategy and sharing inventory information among retailers and manufacturers play crucial roles in reducing holding costs, shortage costs, transportation costs, and excess inventory costs. This leads to enhanced coordination in the decision-making processes of supply chain members. Therefore, this research delves into the investigation of the supply chain coordination mechanism by combining the vendor-managed inventory strategy and revenue-sharing contracts. Additionally, in the developed model, the demand function incorporates a multiplicative factor of elements influencing the profit function, such as retail price, retailer, and manufacturer advertising investments. MethodsIn this article, we study the coordination in a two-level supply chain including one manufacturer and multiple retailers under a revenue-sharing contract, where the pricing and advertising investment strategy of each member of the supply chain is implemented despite vendor-managed inventory in a centralized supply chain. Subsequently, in the decentralized state, we employ the Stackelberg game with manufacturer leadership to determine the optimal variables for both manufacturers and retailers. Finally, to reach coordination and achieve the maximum benefit of the supply chain, we proposed a revenue-sharing contract so that the retailer compensates a part of the costs incurred by the manufacturer by sharing a proportion of the revenue. ResultsA numerical example is presented to show the implementation impact of the revenue-sharing contract on the profit of the chain members. Costs and profit functions are calculated in the Iranian Rial and this system is planned for one year. In this example, it is clear that this contract has been worked successfully and the profit of the supply chain in the coordinated state is equal to the profit under the centralized state. The sensitivity analysis of the model showed that the profit of each member of the chain in a coordinated state is more than their profit in a decentralized state. In addition, advertising investment increases the profits of manufacturers and retailers significantly. As a managerial insight, it is recommended that both levels of the chain place special emphasis on investing in advertising activities. ConclusionThis research was conceived based on a real-world scenario, where a single manufacturer engages with multiple retailers within a market. The findings of this study have broad applicability across various retail industries, including but not limited to fruit and vegetable markets, grocery stores, protein supply chain outlets, health and beauty product suppliers, drugstores, pharmaceutical supply chains, as well as industries such as automotive and petrochemical. The results of this research proved that the vendor-managed inventory strategy increases the interaction between manufacturers and retailers and helps manufacturers access the retailer information to charge products as soon as possible and also avoid excess production.

Keywords

• pricing strategy
• revenue sharing contract
• vendor managed inventory
• game theory
• supply chain coordination