Coordination and profit sharing between a manufacturer and a buyer with target profit under credit option

Several studies have focused on buyer vendor coordination through quantity discount/credit option mechanism but few quantitative models and investigations are available that have explored the mechanism for transfer of surplus generated due to coordination. In this paper, we develop a coordination mechanism through credit option such that both the parties can divide the surplus equitably after satisfying their own profit targets. Two situations are explored here; in the first situation; both the parties have no individual profit target from the business whereas in the second situation, there are individual profit target for both the parties. The proposed mechanism for division of surplus is studied through a numerical study and the impact of different parameter values on the results are examined.