Supply chain coordination with quantity discount policy

This paper develops a model for illustrating how to use quantity discount policy to achieve supply chain coordination. A supplier-buyer system selling one type of product with multi-period and probabilistic customer demand is considered. We first show that if both the buyer and supplier can find a coordination mechanism to make joint decisions, the joint profit in this situation is more than the sum of their profits in the decentralized decision situation. We then show that quantity discount policy is a way that may be implemented to achieve coordination. Our results illustrate that there is a bound of quantity discount in which both sides can accept and the increased profit due to joint decision can be measured using this bound. We finally design a method to divide it between the buyer and supplier, and the optimal quantity discount policy is obtained by using this profit sharing method.