A quantity-flexibility contract with coordination

Motivated by the unique pricing and the contractual structure between a manufacturer and its retailers, and the uncharacteristic manner in the commercialization of newly developed products in the cosmetic industry, this paper studies a quantity-flexibility (QF) contract between a cosmetic manufacturer and a retailer with supply-chain coordination (SCC). By this QF and SCC arrangement, the retailer commits an amount of quantity of newly-developed products, and in return the manufacturer allows the retailer to adjust the order quantities of the commitment quantities based on the inventory balance status and the likely customer demand. We envisage that with this arrangement, both parties can attain maximum profit under the concept of the synergy effect. By developing a two-period dynamic model, we obtain an optimal replenishment strategy for the retailer and the optimal pricing scheme for the manufacturer. By comparing it between models with and without the SCC or quantity adjustment (QA), the numerical analysis and our case application support our theoretical model assertion that the synergy of attaining global (channel) optimal profit for both the manufacturer and the retailer is feasible. The results also show that the advantages of the QF contract with the SCC is very significant.