Coordination of the Supplier–Retailer Relationship in a Multi-period Setting: The Additional Ordering Cost Contract

Coordinating supply chains by adopting a centralized decision making approach, which is theoretically desirable, is often practically infeasible, if not ineffective: the high number of involved companies in a supply chain, the lack of adequate contractual power concentrated in the hand of only a few of them, the difficulty to gather all the relevant information by the unique/few decision maker/s, are some of the many reasons preventing supply chains from implementing such a centralized coordination approach. Supply contracts have been proposed in the literature as an alternate way to face such a problem: they let the chain’s partners to autonomously make decision, but at the same time guide them to behave coherently among each other as well as with the chain’s goal. Designing a contract is quite a challenging task, especially under the hypothesis of multi-period settings, which is the assumption considered in this chapter. In the majority of cases, multi-period supply contracts are inherently complex (e.g. many parameters that need to be frequently updated), therefore difficult to be implemented, as well as often designed under hypotheses barely realistic (e.g. null order costs). We propose a supply contract for a two-stage supply chain (supplier–retailer) in a multi-period setting, which tries to overcome such drawbacks. The proposed contract is based on two key mechanisms: additional ordering cost for retailer and price discount offered by the supplier to the retailer. A numerical analysis is finally conducted to identify the conditions that allow the best performance to be achieved.