Channel coordination under two-level trade credits and demand uncertainty

This study considers a decentralized supply chain where a retailer has an opportunity to order a product from a supplier prior to the sales season to satisfy uncertain demand. The retailer provides trade credit to end customers and makes credit period and order quantity decisions to maximize profits. The end demand is both random and credit period-dependent. On the basis of the newsvendor model, this paper focuses on channel coordination when a retailer provides trade credit to end customers. When the supplier also provides trade credit to the retailer, we show that the traditional trade credit contract cannot coordinate the channel. Four composite contracts based on trade credit (trade credit cost sharing with buy back or quantity flexibility; modified trade credit with buy back or quantity flexibility) are provided to induce the retailer to make decisions while optimizing the channel profit. This paper shows that the retailer provides a longer credit period to its customers and orders a larger quantity from the supplier under the composite contracts. With these contracts, the profit sharing between both parties depends on the wholesale price (Pareto improvement) for the fixed retail price and the purchasing cost.