Coordinating a three-level supply chain with quantity discounts

Numerous examples exist that illustrate how companies enjoying a strong position in a supply chain unilaterally dictate terms to their suppliers and/or their customers. This paper suggests a mechanism by which a company can coordinate its purchasing and production functions and create an integrated...

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Bibliographic Details
Published in:IIE transactions 2001-05, Vol.33 (5), p.371-384
Main Authors: MUNSON, CHARLES L., ROSENBLATT, MEIR J.
Format: Article
Language:English
Subjects:
Automobile dealers
Corporate profits
Cost control
Decision making
Discounts
Leadership
Mathematical models
Order quantity
Production planning
Purchasing
Retail stores
Studies
Suppliers
Supply chains
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Summary:Numerous examples exist that illustrate how companies enjoying a strong position in a supply chain unilaterally dictate terms to their suppliers and/or their customers. This paper suggests a mechanism by which a company can coordinate its purchasing and production functions and create an integrated plan that dictates order and production quantities throughout a three-firm channel. Specifically, we model a company that attempts to dictate channel lot sizes by obtaining a quantity discount from its supplier while offering perhaps a different one to its customer. Previous quantity discount research has examined supply chains consisting of only two levels, a seller and a buyer. This paper considers a three-level chain (supplier-manufacturer-retailer) and explores the benefits of using quantity discounts on both ends of the supply chain to decrease costs. We show that incorporating quantity discounts into both ends of the supply chain can significantly decrease costs compared to concentrating only on the lower end. Furthermore, the results of the decentralized procedure described here are robust vis-a-vis à centralized decision-making procedure.
ISSN:0740-817X
2472-5854
1545-8830
2472-5862
DOI:10.1080/07408170108936836