A new method for supply chain coordination with credit option contract and customers’ backordered demand

Abstract

This paper studies the issue of channel coordination for a decentralized supply chain consisting of one vendor and one buyer in multi-period setting. Considering the allowance of the backorder at the buyer side distinguishes this work in the literature. The credit option contract as an incentive scheme is pursued to encourage the buyer to participate in the coordination model. Order quantity, credit time and backordered demand in each period as decision variables are determined jointly in order to encourage the chain’s member to participate in the coordinating contract. The proposed model shows that the credit option contract for the case of backorder allowance is able to realize the channel coordination in the studied supply chain. A wide range of numerical examples are studied to analyze the sensitivity of the contract efficiency to the inventory system’s parameters such as order cost, holding cost and shortage cost.