Coordinated decisions for substitutable products in a common retailer supply chain

This paper studies coordination mechanisms in a supply chain which consists of two suppliers with capacity uncertainties selling differential yet substitutable products through a common retailer who faces price-sensitive random demand of these two products. We develop in a noncompetitive setting three coordination models – revenue sharing, return policy, and combination of revenue sharing and return policy – and contrast them with a basic and uncoordinated model. We are able to establish the ordinal relationship among the retailer’s ordering and pricing decisions and analytically compare the performances between certain models when two suppliers are identical. We find that the retailer’s ordering and pricing decisions in the model with return policy in the case of identical suppliers are independent of demand or supply uncertainty. Our numerical results reveal that the performances of coordination models in the case of nonidentical suppliers resemble those in the case of identical suppliers. We find that the retailer will place a larger order quantity in models where her average cost per unit sold is smaller. We also find that product substitutability and uncertainties have different effects on chain performances.