Coordinating supply chains via advance-order discounts, minimum order quantities, and delegations

What is it about?

We show that an advance-order discount contract in a two-echelon make-to-order supply chain is a Pareto-improving, but not coordinating. A variation of this contract, where a minimum order quantity is imposed to gain access to the advance-order discount, is both Pareto-improving and coordinating. When the ordering and salvaging activities are delegated to the supplier, the Pareto-improving and coordinating contract also allows the supply chain profit to be arbitrarily apportioned between the manufacturer and the supplier.

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Why is it important?

This paper will be important for managers is settings where a single selling season exists for a built-to-order product that could be produced earlier if the supplier can entice the manufacturer to place early orders at risk. The early orders can be produced at a lower cost; this cost reduction can be shared among the supply chain members.

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