Using contract mechanisms to coordinate product line decisions in supply chains

This paper addresses product line decisions in a supply chain (SC) consisting of a single Buyer, a single Supplier and end-consumers comprised of two segments with different willingness-to-pay. Under the assumption that the final demand and the segments’ willingness-to-pay are deterministic, it is demonstrated that sub-optimization occurs when the decisions are decentralized. That is, a decentralized SC can sell a lower or a higher number of product variants when compared to a centralized SC. To overcome this issue, contract mechanisms such as slotting allowance and revenue sharing are analyzed for their ability to provide SC coordination and win-win opportunities for all parties involved.