Supply chain coordination under vendor managed inventory-consignment stocking contracts with wholesale price constraint and fairness

In the retailing industry, dominant retailers usually set constraints on a supplier's wholesale price and obtain most of the supply chain profit. This unfair profit allocation may cause bankruptcy of small suppliers due to low margins. This paper investigates the supply chain coordination under a vendor managed inventory-consignment stocking contract with wholesale price constraint and fairness considerations. First, we derive the retailer's optimal wholesale price constraint (WPC) and the supplier's optimal production quantity. Then, we derive the supply chain coordination condition by considering the fairness of profit allocation between the retailer and the supplier. Our analyses show that increasing the fairness preference not only restricts the retailer's utility function and WPC, but also increases the supplier's expected profit and production quantity. Furthermore, supply chain coordination can be achieved only when the retailer has a large fairness preference. Through a simulation study of multiple-period decision-making problems, we illustrate the benefits and motivation for the retailer to consider fairness in profit allocation when production cost and market demand are uncertain.