Coordination and profit sharing in a two-level supply chain under periodic review inventory policy with delay in payments contract

In this paper, a coordination model has been investigated for a two-level supply chain (SC) consisting of one retailer and one supplier under periodic review inventory system. The review period and the retailer’s safety factor are assumed to be decision variables. The retailer faces stochastic demand following a normal distribution with known mean and variance. Moreover, it is assumed that unmet demand will be backordered. Firstly, the investigated SC is modeled under the decentralized and centralized decision-making structures, afterwards, a coordination mechanism based on delay in payments is proposed for transition from the decentralized to centralized model. To fairly share the surplus profit obtained by coordination, a profit sharing strategy is developed which is based on the bargaining power of the two SC members. Finally, a set of numerical experiments and sensitivity analysis are carried out. Numerical examples indicate that the proposed delay in payments contract can achieve channel coordination and the whole SC cost will decrease under the coordination model while the costs of neither retailer nor the supplier will increase.