Coordinating the newsvendor under channel rebates with effort dependent demand

A supply chain is two or more parties linked by a flow of goods, information, and funds. When one or more parties of the supply chain try to optimize their own profits, system performance may be hurt. Supply chain contract is a coordination mechanism that provides incentives to all of its members so that the decentralized supply chain behaves nearly or exactly the same as the integrated one. A channel rebate is a payment from a supplier to a retailer based on retailer sales to end consumers. When demand is influenced by retailer sales effort, each of the buy backs, profit sharing and quantity flexibility contracts no longer coordinates on its own. To solve this problem, we employ a simple model combined with rebate. By analyzing we find that a properly designed target rebate and supply chain contract achieves coordination and a win-win outcome. This paper addresses two problems: (1) how to coordinate the decentralized supply chain; (2) how to determine the combined effort and inventory decision.