Buy-Back Contracts and Forecasting Incentives in a Supplier-Retailer Channel
40 Pages Posted: 13 Sep 2006
Date Written: September 2005
We consider a supplier of style goods who sells his products through a single retailer. Previous research has shown that there exists a continuum of buy-back contracts which can induce the retailer to order the system optimal quantity. In this paper we show that when forecasting choice is included in the decision space, depending on the forecasting ability of the channel members, only certain buy-back contracts can induce both parties to invest in forecasting. To understand the interrelationships between order quantity coordination and forecasting, we first develop a framework for modeling the existence of different forecasts in a supplier-retailer supply chain. The value of combining these forecasts to yield more accurate demand information is then characterized. We show that when both channel members have the ability to forecast and the cost of such forecasting is not prohibitive, there is a unique equilibrium in which the retailer extracts additional profit. Under varying assumptions on the forecasting capability of both channel members and channel margin, we analyze buy-back contracts that can coordinate the channel.
Keywords: Collaborative Forecasting, Return Policies, Buy-back contracts, Supply Chain Coordination
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