A new perspective in supply chain coordination

Abstract

Discount models have been used extensively in the past to achieve coordination between a buyer and a vendor in the context of supply chain management. Such models are based on the vendor offering a discount to the buyer so as to entice him to order in higher batch sizes. The solution is achieved at the point where the vendor is better off and the buyer is not worse off. In this paper we suggest the use of ‘reverse discount’ as another mechanism for coordination between the buyer and the vendor. The proposed model analyzes the coordination achieved by allowing the buyer to offer a higher price to the vendor, to motivate him in order to reduce the batch size. Various scenarios have been analyzed including determining the net savings a buyer can get through such an increase. The model has been extended to incorporate the case of information asymmetry.