Coordination contracts in the presence of positive inventory financing costs.pdf

ARTICLE IN PRESS Int. J. Production Economics 124 (2010) 331–339Contents lists available at ScienceDirectInt. J. Production Economics0925-52 doi:10.1  Corr E-m (B.-D. R 1 Ch Busines 2 By Adminisjournal homepage: /locate/ijpeCoordination contracts in the presence of positive inventory financing costsChang Hwan Lee 1, Byong-Duk Rhee ,2 Ajou University, 5 Woncheon-dong, Yeongtong-gu, Suwon 443-749, Republic of Koreaa r t i c l e i n f o Article history: Received 1 June 2009 Accepted 7 November 2009 Available online 26 November 2009 Keywords: Inventory financing costs Trade-credit Supply chain coordination Newsvendor framework73/$ - see front matter 2009 Elsevier B.V. A 016/j.ijpe.2009.11.028 esponding author. Tel.: +82312193630; fax ail addresses: chlee@ajou.ac.kr (C.H. Lee), brh hee). ang Hwan Lee is a professor of operation s Administration. ong-Duk Rhee is a professor of market tration.a b s t r a c t Numerous studies have offered diverse contractual forms of alliance, in which the supply chain partners coordinate their decisions for greater joint performance in an entirely self-interested way. Prior literature implicitly assumes free inventory financing. However, this assumption is questionable in the real marketplace. Firms frequently finance their working capital from a variety of credit sources, such as banks, and incur positive costs of the funds for inventory. Surprisingly, the impact of inventory financing costs on supply chain coordination has not been sufficiently investigated by supply chain academics. We address this issue by explicitly assuming capital-constrained agents and positive inventory financing costs. Specifically, we consider four extensively discussed coordination mechanisms for investigation: (i) all-unit quantity discount, (ii) buybacks, (iii) two-part tariff, and (iv) revenue-sharing. We show that, under the assumption of positive inventory financing costs, these contracts fail to achieve joint profit maximization if each agent relies on