Optimal contract strategies for two stage supply chain

The present article investigates the issue of channel coordination of a manufacturer and a retailer facing stochastic demand that is sensitive to promotional effort. In newsvendor setting, the return policy, sharing contract on promotional effort, and discount on whole sales price provided by the manufacturer have been shown to be able to align incentives of the members of the chain. An analytical method has been provided to determine the optimal contract parameters of the channel. Numerical examples are also illustrated to justify the model.

►Two‐layer supply chain model is developed for uncertain demand in the market. ►Promotional effort is incorporated to motivate the end customers. ►Discount and cost sharing for promotional effort is also introduced in this model.