Coordinated Drop Shipping Commitment Contract in Dual-Distribution Channel Supply Chain

It is a general trend for retailers to develop dual channel to serve different customers. Engaging in internet and drop shipping has raised serious awareness and attention in the retailing field. Retailers are competing for dominance from suppliers using terminal position in many industries like appliance and fast moving consumer goods. In this paper, the authors examine such supply chain context and propose the commitment contracts for the drop shipping supply chain. In a drop-shipping model, the retailer focuses on marketing and customer acquisition, so it has more customer demand information than the supplier. To optimize profit, the retailer usually sends over-estimated demand information to the supplier. On the contrary, the supplier has to design a contract to control such a behavior of the retailer. Their study is to optimize the profit of the supplier and the whole supply chain using the commitment contract that can coordinate the retailer and the supplier in dual-channel and drop-shipping supply chain. If the retailer’s order quantity achieves centralized level, the profit of the supply chain can be maximized.