Using quantity discounts to improve coordination in a two-level supply chain

Numerous coordination mechanisms have been studied with a goal of improving supply chain performance without making the individual partners worse off than in the absence of coordination. In this paper we focus on quantity discount mechanisms for a two-level supply chain with one supplier and one retailer, where the retailer must meet a sequence of dynamic demands and both players possess a lot-sizing cost structure. The supplier and the retailer play a Stackelberg game, assuming the supplier has full information of the retailer's cost structure. Assuming a fixed quantity discount breakpoint, we propose an algorithm for the supplier to determine a discount level that may improve both the supplier's profit and overall supply chain performance. Our computational tests show encouraging results for the effects and efficiency of the proposed quantity discount schemes.

Using quantity discounts to improve coordination in a two-level supply chain Conference Paper