Coordinating a three-level supply chain with price discounts, price dependent demand, and profit sharing

This paper proposes a three-level (supplier-manufacturer-retailer) supply chain model with a profit sharing mechanism to maximise the supply chain profit. In this model, an all-unit price discounts scheme is used to coordinate the order quantities among the supply chain levels, and the demand at the retailer's end is assumed to be price dependent. To enhance the coordination in the supply chain, two profit-sharing scenarios are investigated. The semi-liberal scenario is based on increasing the quantity discount in order to generate more demands with which the most powerful player in the chain will get the highest fraction of additional profits. However, a strict mechanism is suggested to rectify the first scenario by dividing the coordination profits based on equal return on investments. Computational results are provided under different patterns of the players' order or set-up costs along the chain. Furthermore, the results show that the strict mechanism is the best mechanism for profit sharing among the players in the supply chain.