Coordinating manufacturer and retailer using a novel robust discount scheme

Buffer management (BM) is an inventory management methodology introduced by theory of constraints (TOC). In this practice, the retailer passes his demands to the vendor in ‘almost a daily manner’ and has a ‘dynamic inventory buffer’ that reflects the change in demand patterns allowing the vendor the opportunity to replenish his inventory and obtain some market information. In this paper, we consider a supply chain consisting of a manufacturer and a retailer for which both are implementing the BM. We discuss how the vendor and the retailer can take advantage of demand information created by BM, through a process of bargaining, to coordinate their supply chain and increase their profitability. To do so, we have simulated the 254 M.M. Tabrizi et al. BM process and used response surface methodology (RSM) to obtain each party’s profit function. Then, their equilibrium state strategies are developed using the Nash arbitration scheme. In addition, we propose a method to obtain a robust strategy against variations in uncontrollable factors for both the manufacturer and the retailer. Moreover, we show that this equilibrium can be further improved if both parties are willing to cooperate through side payment contracts. A numerical example and the corresponding sensitivity analysis are presented to illustrate the results.