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Coordinating Supply Chains with Simple Pricing Schemes: The Role of Vendor-Managed Inventories

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  • Fernando Bernstein

    () (The Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Fangruo Chen

    () (Graduate School of Business, Columbia University, New York, New York 10027)

  • Awi Federgruen

    () (Graduate School of Business, Columbia University, New York, New York 10027)

Abstract

We characterize supply chain settings in which perfect coordination can be achieved with simple wholesale pricing schemes: either retailer-specific constant unit wholesale prices or retailer-specific volume discount schemes. We confine ourselves to two-echelon supply chains with a single supplier servicing a network of retailers who compete with each other by selecting sales quantities. We identify a key sufficient condition, in terms of interdependencies between chain members' operational decisions, under which perfect coordination via simple schemes is feasible, under general cost and demand functions. This condition, which we refer to as echelon operational autonomy (EOA), states that the costs incurred by the supplier for a given vector of sales volumes depends only on operational decisions she controls herself. At the same time, the costs incurred by the retailers may depend on operational decisions controlled by the supplier, in which case, the supplier's operational decisions are made to minimize chainwide costs. We show how vendor-managed inventory (VMI) partnerships create EOA and compare the resulting coordinating pricing schemes with those required in a traditional decentralized setting (without EOA). We also discuss compliance issues with the coordinating schemes in view of the Robinson-Patman act and provide remedies to overcome these issues.

Suggested Citation

  • Fernando Bernstein & Fangruo Chen & Awi Federgruen, 2006. "Coordinating Supply Chains with Simple Pricing Schemes: The Role of Vendor-Managed Inventories," Management Science, INFORMS, vol. 52(10), pages 1483-1492, October.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:10:p:1483-1492
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0564
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    References listed on IDEAS

    as
    1. Fernando Bernstein & Awi Federgruen, 2005. "Decentralized Supply Chains with Competing Retailers Under Demand Uncertainty," Management Science, INFORMS, vol. 51(1), pages 18-29, January.
    2. Ki Ling Cheung & Hau L. Lee, 2002. "The Inventory Benefit of Shipment Coordination and Stock Rebalancing in a Supply Chain," Management Science, INFORMS, vol. 48(2), pages 300-306, February.
    3. Fangruo Chen & Awi Federgruen & Yu-Sheng Zheng, 2001. "Coordination Mechanisms for a Distribution System with One Supplier and Multiple Retailers," Management Science, INFORMS, vol. 47(5), pages 693-708, May.
    4. Z. Kevin Weng, 1995. "Channel Coordination and Quantity Discounts," Management Science, INFORMS, vol. 41(9), pages 1509-1522, September.
    5. Charles A. Ingene & Mark E. Parry, 1995. "Channel Coordination When Retailers Compete," Marketing Science, INFORMS, vol. 14(4), pages 360-377.
    6. GĂ©rard P. Cachon & Paul H. Zipkin, 1999. "Competitive and Cooperative Inventory Policies in a Two-Stage Supply Chain," Management Science, INFORMS, vol. 45(7), pages 936-953, July.
    7. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
    8. Marcel Corstjens & Peter Doyle, 1981. "A Model for Optimizing Retail Space Allocations," Management Science, INFORMS, vol. 27(7), pages 822-833, July.
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