Network design of a decentralized distribution supply chain: Analysis of non-cooperative equilibrium vs. coordination with discount or buyback mechanism

This paper develops a model for illustrating how a manufacturer can use his initiative to organize retailers when they make decisions as independent actors. The candidate retailers are able to distribute products over geographically dispersed markets with stochastic demands. Each manufacturer's decision about selecting a set of retailers results in a unique distribution network design. Taking transportation and inventory costs into account, each candidate retailer determines order quantity to satisfy market demand, while the manufacturer specifies the wholesale price, pursuing uniform or retailer-specific pricing policies, depending on trade legislation. In this single period problem and under mild assumptions on demand distribution, we show that a non-cooperative equilibrium exists for each distribution network design. We also propose distinctive coordination mechanisms corresponding to pricing policies. Using these mechanisms in each design of the distribution network, the profits of the manufacturer and retailer are better compared to those in non-cooperative situations. Lastly, numerical examples presented in this paper, comprised of the sensitivity analysis of some key parameters, seek to compare the results of different distribution network designs under various pricing policies, yielding some applicable managerial insights. (C) 2014 Sharif University of Technology. All rights reserved.