Analysis of supply chain coordination with profit sharing in a clearance sale market

Optimal decision-making by manufacturers and retailers in a supply chain under a clearance sale market has been discussed for many years. However, the combination of a clearance sale and profit sharing has not been discussed substantially. In this paper, we present an approach for optimal decisions regarding order quantity and discount ratio in a supply chain with return handling and profit sharing. We assume that a single product is sold in three consecutive periods; the normal sale period, the clearance sale period and the disposal sale period. Two types of supply chains that consist of a manufacturer and a retailer are analyzed; 1) a decentralized supply chain, and 2) a centralized supply chain. In type 1), the decision is made to maximize the retailer's expected profit. In type 2), the decision is made to maximize the whole profit integrating both players' expected profits. We also discuss supply chain coordination as a manufacturer-retailer partnership based on profit sharing. The profit sharing is permitted only in type 2) as the effect of coordination between both players. The results of the coordination effect are shown in numerical examples, that compare the expected profits of each player and the whole system in type 1) with those in type 2) where profit sharing is permitted.