Two level supply chain coordination with delay in payments for fixed lifetime products

In this paper, a single-vendor, single-buyer supply chain system for fixed lifetime products is considered in the settings of both decentralized and centralized models. In the decentralized model, the vendor is the decision-maker of the supply chain. In particular, we study the coordination between the vendor and the buyer that allows the buyer to delay his payment in compensation for altering his order size. This policy has been studied in the literature for the products with unlimited lifetime. In this paper, we focus on the products with fixed and limited lifetime which is common in practice. To evaluate the efficiency of the proposed delay in payments policy, a centralized decision-making problem is modeled, where there is a common decision-maker for both the vendor and the buyer. We derive analytically tractable solutions to the proposed models. Furthermore, we prove that the decentralized model can achieve the same minimal cost as the centralized model when the vendor and the buyer’s costs of capital are equal. A detailed numerical example is presented to illustrate the benefit of the proposed delay in payments policy.

► We propose and analyze the supply chain coordination models for fixed lifetime products through delay in payments. ► The buyer’s ordering quantity with coordination is larger than that without coordination. ► The annual cost of the system can be reduced through delay in payments. ► Delay in payments can achieve the system optimization if both parties’ costs of capital are equal.