A supply chain coordination model using buyback contract considering effort dependent demand

This paper deals with the coordination of a two-stage supply chain, including a supplier and a retailer. The final demand is sensitive to the sales promotion and the quality improvement done by the retailer and the supplier, respectively. In the standard newsvendor setting, a buyback contract integrates the decentralized system where both members try to optimize their own profit. We showed that a buyback contract could not thoroughly coordinate the supply chain even though it enhances the whole supply chain profit. Therefore, in this research, we extended a new contract based on a buyback contract with which both members share the costs of efforts. The results showed that this contract can coordinate the channel and provide a win-win condition for supply chain components. The numerical example is used to indicate the results and obtain more insights. The optimal sales and quality efforts and the optimal order level are also determined, resulting in the optimal supply chain profit. Sensitivity analyses are performed in order to investigate the effects of different parameters on decision variables and profit. The results showed that the supply chain performance decreases by incrementing the cost coefficients of sales effort and quality efforts.