Supply chain coordination for the joint determination of order quantity and reorder point using credit option

Decisions regarding order quantity and reorder point are two major challenges in supply chain inventory management. In this paper, a coordination model of the joint determination of these two decision variables is proposed. A decentralized supply chain consisting of one buyer and one supplier in a multi-period setting is investigated. Demand and lead times are uncertain in our model. An incentive scheme based on credit option has been developed to encourage the buyer to participate in the coordination model. In this model, the downstream member has the option of using credit to purchase goods during the credit time, subject to its commitment to a jointly agreed order quantity and reorder point. The credit time is determined in such a way that the two parties have incentives to participate. The proposed incentive scheme can share the benefits of coordination between the two members based on their bargaining power. The proposed model shows that the coordination of the reorder point, together with order quantity, can increase the overall chain profitability as well as each member’s profitability.