Analysis of price-only and revenue sharing contracts in a reverse supply chain

Biazaran, Majid
Original Equipment Manufacturers prefer to fully or partially outsource take-back activities, such as used product acquisition and handling, since dealing with reverse flow of goods is not their core competency. However, outsourcing may cause the supply chain to suffer from local optimization that results from decentralization. In such cases, different forms of contracts are offered to reduce the effects of decentralization. In this study, we consider a two-echelon reverse supply chain where a remanufacturer, facing a random demand, orders from a collector, which is in charge of used product acquisition. We analyze the decentralized decision making process under both the remanufacturer’s and collector’s lead considering both price-only and revenue sharing contracts. We demonstrate that there exists a wholesale price that can coordinate reverse supply chain and allocate positive profits for both parties. We also show that there exist a menu of revenue sharing contracts that can also coordinate reverse supply chain, which provides more flexibility for negotiation between parties compared to the wholesale price-only contact. Furthermore, we investigate the effects of problem parameters on the optimal decentralized decisions and coordinating contracts through an extensive numerical study.