Coordination and defect management strategy for a two-level supply chain under price and sales effort-sensitive demand

This paper presents a single-manufacturer single-retailer supply chain model with an imperfect production system at the manufacturer. The manufacturer meets the order quantity of the retailer in unequal-sized shipments. After receiving each delivery, the retailer performs an inspection process that is erroneous and results in misclassification errors (Type-I and Type-II errors). Defective items are returned to the manufacturer, who conducts a rigorous screening to classify the defective items into repairable, design-flawed and non-repairable ones. The manufacturer incurs carbon emissions cost due to transportation and disposal of scrap items to get one step closer to sustainability. Customers at the retailer are influenced by retail price and sales effort. Optimal shipment policy, pricing and inventory decisions are determined in both the decentralised (based on the Stackelberg leader-follower gaming approach) and the centralised scenarios. A trade credit mechanism and wholesale price discount contract are employed and a fair profit-sharing strategy is implemented based on the supply chain member's bargaining power. The conditions for participating in these coordination mechanisms are examined from the point of view of each supply chain member. Finally, a numerical experiment along with sensitivity analysis is carried out to illustrate the applicability of the proposed coordination mechanisms and defect management policy.