Procurement mechanism design in a two-echelon inventory system with price-sensitive demand

摘要

Assume a buyer who purchases a product from a supplier for direct sale to consumers or further value addition. Supplier's production cost is not known to the buyer. The buyer sells the product to customers at a suitable price. The Buyer and the supplier hold inventories independently to improve their performances. The buyer is interested to find a procurement mechanism that maximizes his profit. Buyer incurs the procurement cost and the operating cost. Supplier's delivery time is a very important component in the profitability of the buyer since higher lead time results in the increase in the operating cost. Another parameter to be decided is the quantity to be procured by the buyer which depends on the demand that is linked directly to the selling price set by the buyer. The buyer's objective is to design a contract that maximizes the profit, and that the supplier will provide the cost structure and the supplier assures certain delivery schedule and the buyer assures a payment schedule. With this as the basis an optimum procurement policy is formulated.