A credit mechanism in coordinating quality level, pricing and replenishment decisions with deteriorating items

In this paper, we present a two-level supply chain (SC) consisting of a single manufacturer that suppling one type of deteriorating product to a single retailer that the market demand rate for the product is time-varying and depends on two endogenous variables that include the retail price and product quality. The objective of this paper is to determine simultaneously pricing policy and ordering for the retailer, as well as product quality optimizing strategy for the manufacturer. Firstly, the problem is formulated under a decentralized structure with a manufacturer-Stackelberg game where each member optimizes his/her decisions regardless of the others’ profitability. Next, a centralized structure was presented and optimized based upon the whole SC profitability. Although the centralized model improves the quality level of the product and profitability of the entire SC, it may reduce the profitability of each SC members. Then, this paper is developed with an incentive scheme based on credit policy to coordinate this system. Moreover, Numerical examples and sensitivity analysis are presented to indicate the effectiveness of the contract. The results show that the credit contract can lead to perfect coordination, while the coordinated system is more robust than the centralized system. This paper extends the understanding of supply chain coordination in the context of deteriorating items that indisputably have a reciprocal relationship with market time-varying demand in many real-life cases.