Channel coordination in a consignment contract

• Published in: European journal of operational research 2010-12, Vol.207 (2), p.897-905
• Main Authors: Zhang, Dengfeng, de Matta, Renato, Lowe, Timothy J.
• Format: Article
• Language: English
• Subjects: Applied sciences; Channel coordination; Channels; Consignment buying; Contracts; Coordination; Design engineering; Exact sciences and technology; Inventory control, production control. Distribution; Markets; Operational research; Operational research and scientific management; Operational research. Management science; Operations research; Pricing; Production; Retailing; Retailing Production Pricing Channel coordination; Revenue sharing; Revenues; Studies; Suppliers; Transportation
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2010.05.027

With the emergence of virtual market places, consignment selling has been thriving at an unprecedented pace. It has been shown in the literature that inefficiency exists in a decentralized consignment channel with a single revenue share agreement. In our study, we analyze contracts observed in practice that contain bonus or side payment terms, and examine whether they can promote better coordination between the supplier and the retailer. We found that no multi-tier Bonus system can fully coordinate the consignment channel. However, fine adjustments of bonus parameters can bring the channel close to full coordination. Additionally, we found revenue sharing with side payment contracts not only fully coordinate the channel, but they can also be customized to meet the needs of small, medium and large suppliers for extra retailer services such as warehousing and transportation. Managerial insights on how to design the contracts from the supplier, retailer and channel perspectives are discussed in the paper.