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Buy-back Policy for Supply Chain Coordination: A Simple Rule

Article  in  International Journal of Operational Research · March 2018

DOI: 10.1504/IJOR.2018.10009394

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Int. J. Operational Research, Vol. X, No. Y, xxxx 1

Buy-back policy for supply chain coordination: a

simple rule

Rajen Tibrewala
School of Management,
New York Institute of Technology,
Old Westbury, NY, USA
Email: tibrewal@nyit.edu

Ravi Tibrewala
Allstate Insurance,
Long Beach, NY, USA
Email: ravi@tibrewala.net

P.L. Meena*
School of Management,
New York Institute of Technology,
Old Westbury, NY, USA
Email: pmeena@nyit.edu
*Corresponding author

Abstract: In this paper, a simple and novel procedure is proposed to determine

a set of buy-back prices and the wholesale costs to maximise the profit of a
two-stage supply chain consisting of one supplier and one retailer. A supplier
(or manufacturer) can implement a buy-back policy to influence the quantity
ordered by its retailer. We have developed a simple rule to achieve channel
coordination in a two-stage supply chain dealing with a limited life product. A
numerical experiment has been conducted to illustrate the proposed model.
Sensitivity analyses are performed to show the impact of various parameters on
supply chain profit. The results depict that a higher degree of channel
coordination not only increases the expected supply chain profit but also
decreases the impact of demand uncertainty on expected profit. Moreover, the
sensitivity results show that the increase in the degree of channel coordination
decreases the coefficient of variation in retailer’s profit. Finally, the
implications of using these results for the managers have been discussed.

Keywords: supply chain; coordination; buy-back contract; channel

coordination.

Reference to this paper should be made as follows: Tibrewala, R., Tibrewala,

R. and Meena, P.L. (xxxx) ‘Buy-back policy for supply chain coordination: a
simple rule’, Int. J. Operational Research, Vol. X, No. Y, pp.000–000.

Biographical notes: Rajen Tibrewala has a doctorate in Operations Research

from Columbia University. He is currently working as Professor at the School
of Management, New York Institute of Technology. His research interests are
in the area of algorithm development, productivity improvement and strategic

Copyright © 20xx Inderscience Enterprises Ltd.

2 R. Tibrewala et al.

planning. He has published in a large number of journals including

Management Science, the Canadian Journal of Operations Research, and
Retina. He has published an 11 volume guide on systematic energy
conservation for manufacturing industry. He has worked as a consultant to
more than 50 different organisations.

Ravi Tibrewala has two undergraduate degrees one from Indiana University
Kelley School of Business in 2004, and the other in Hospitality Management
from New York Institute of Technology in 2007. He has worked in
telecommunications for seven years for T-Mobile, AT&T, and Cingular. He
was one of the founders of a startup company in the cosmetic industry called
Greek Clay. He is currently works for Allstate Insurance in business
development.

P.L. Meena is currently working as an Assistant Professor at the School of

Management, New York Institute of Technology. His research interests are in
the area of supply chain risk management, sustainable supply chain, supply
chain performance, and optimisation. His papers have been published in several
journals including Transportation Research Part E, Industrial Management
and Data Systems, Business and Industrial Marketing, International Journal of
Advanced Manufacturing Technology, Benchmarking: An International
Journal, etc. His PhD dissertation won the ‘2012 Emerald/EFMD Outstanding
Doctoral Research Award’ in Logistics and Supply Chain Management
Category. He is currently serving as an editorial board member for more than
ten international journals.

1 Introduction

The objective of every supply chain is to maximise the combined overall value generated
by all supply chain partners. The value a supply chain generates is the difference between
what the final product is worth ($) to the customer and the effort ($) supply chain
expends in fulfilling the customer’s request (Chopra and Meindl, 2013). In today’s
business environment, the goal of any supplier or manufacturer is to offer the maximum
amount of product available for sale to customers while ensuring a reasonable profit for
all supply chain members. One of the approaches suggested by several authors
(Pellegrini, 1986; Marvel and Peck, 1992; Padmanabhan and Png, 1993, 1995a, 1995b;
Lin, 1993; Gilbert, 1998; Liu and Wu, 2010; Wang et al., 2010; Chung and Erhun, 2013;
Wei et al., 2013) for improving the supply chain profitability is to have a buy-back
contract between the retailer and the manufacturer. In a buy-back contract, the supplier
charges the buyer a fixed amount per unit purchased, but makes a (lower) per unit
payment to the buyer for each unit remaining at the end of the season; if the supplier’s net
salvage value is less than the buyer’s net salvage value, the buyer salvages the units and
the supplier credits the buyer for those units (Pasternack, 1985; Cachon, 2003). Previous
research suggests that buy-back and revenue sharing contracts are the most commonly
used flexible contracts (Cachon, 2003; Cachon and Lariviere, 2005). The buy-back
contract has been adopted by various industries including publishing, high-tech, and
fashion apparel. We refer interested readers to Kannan et al. (2013) who have provided
an excellent review on various supply chain contracts within forward and reverse supply
chains.
 Buy-back policy for supply chain coordination: a simple rule 3

Ozen et al. (2012) studied the coordination issue between manufacturer and multiple
retailers through three parameters buy-back contract. They showed that three-parameter
contract could coordinate the system if the retailers have symmetric margins.
Furthermore, such contracts also increase the manufacturer’s profit. Wu (2013)
investigated the impact of a buy-back policy on retail price, order quantity, and wholesale
price in two-stage supply chains under stochastic demand. They showed that a buy-back
strategy can lead to a higher profit than non-buy-back under vertical integration as well as
a manufacturer’s Stackelberg Condition. Tang and Kouvelis (2014) studied a single
supplier and single retailer supply chain coordination problem where the supplier’s
production process is subject to random yield losses. They found that the combination of
a buy-back and revenue sharing mechanism can coordinate the supply chain under
uncertain production and customer demand. Recently, Ren et al. (2015) analysed the
coordinating mechanism between a single manufacturer and multiple independent
retailers under decentralised distribution settings. They showed that perfect supply chain
coordination can be achieved by the buy-back contract with flexible allocation of the
profit.
Most of the aforementioned studies have used rigorous mathematics to examine the
issue of how a supplier (or manufacturer) can set the buy-back price and the wholesale
cost to maximise the supply chain profit. However, there is a dearth of literature that
suggests a simple approach to address the aforementioned issue. We attempt to fill this
gap. Specifically, this paper focuses on the economics of a buy-back policy and its impact
on the wholesale cost, the supplier’s profit, and the retailer’s profit. This paper is limited
to the development of simple rules, which could be proven without the use of complex
mathematics. The results clearly demonstrate the benefits of channel coordination, which
not only maximises the supply chain profit but also helps the supply chain members to
cope with uncertain demand.
The remainder of the paper is organised as follows. Section 2 describes the problem.
Literature review and the model development are included in Section 3. Section 4
describes the proposed simple rule to solve the problem. Section 5 provides a detail
numerical example. The sensitivity analysis of various parameters is performed in
Section 6. Finally, research conclusions and scope for the future work are discussed in
Section 7.

2 Description of the problem

In an environment of uncertain demand, the retailer is faced with a critical decision of

how many units should be stocked and offered for sale to the customers. This decision is
usually based on the amount of profit the retailer will make by selling a unit versus the
amount of loss for each unsold unit. The problem becomes even more acute for products
with limited shelf life and low salvage value. In such cases, a retailer is likely to be more
conservative by ordering fewer units. Furthermore, the retailer may resort to price
discounting, discouraging returns from final customers, or selling stale products. All
these actions by a retailer could seriously damage the brand and reduce market share of
the supplier or the manufacturer.
One of the approaches, which a manufacture can use to control retailer behaviour, is
to offer a buy-back policy for the unsold items (Tsay et al., 1999; Wei et al., 2013;
4 R. Tibrewala et al.

Kannan et al., 2013). Such a policy will encourage the retailer to buy more items and
discourage the retailer from selling stale products and discounting. This paper focuses on
a two-stage supply chain which consists of one retailer and one supplier or manufacturer.
It is assumed that the supply chain sells a single product and the demand for this product
follows a Normal distribution. The order quantity decision must be made in advance and
all unsold product must be salvaged at the end of the period.
When a retailer makes this decision independently, the key factors under
consideration are the unit wholesale cost paid to the supplier, unit selling price, salvage
value, and the probability distribution of demand. By offering a buy-back price, the
supplier can change the salvage value for the retailer, which in turn will change the order
quantity. From a supply chain perspective, the wholesale cost charged to retailer and the
buy-back price are internal transfers between supply chain members, whereas the selling
price, the salvage value, and the variable cost of producing and shipping are external.
This paper specifically addresses the issues of how the supplier (or manufacturer) can set
a buy-back price and a wholesale cost so that the supply chain profit is maximised?
Moreover, a simple rule for achieving channel coordination has been proposed and
proven mathematically efficient.

3 Literature review

The relevant literature has been classified in the following categories. First, we discuss a
single period inventory model also known as the newsboy problem. Further, we discuss
the literature related to channel coordination dealing with retailer decision, supplier
decision, and a combined supply chain decision.

3.1 Single period inventory model

A single period inventory model deals with finding the optimum stocking level of a
product, which cannot be stored from one period to another period. A large amount of
research has been published on this topic (Goodman and Moody, 1970; Fries, 1975;
Nahmias, 1975; Pasternack, 1980; Sasieni et al., 1959; Ackoff and Sasieni, 1968;
Richmond, 1968; Wagner, 1969; Peterson and Silver, 1979; Trueman, 1981; Chen et al.,
2014; Sayın et al., 2014).
Keren (2009) studied a special form of the single-period inventory problem (news
vendor problem) with a known demand and stochastic supply. The author described the
analytical solution for uniformly distributed supply risk and found that it is optimal to
order more than what is required as the larger order increases the manufacturer’s optimal
production quantity. Qin and Kar (2013) investigated the single period inventory
Newsboy problem under uncertain environment. They derived the optimum order
quantity and total expected profit expression using the identification functions of the
uncertain variable.
The key characteristics of the single period inventory model are as follows: inventory
must be built (or order must be placed) before the period begins, any item not sold or
used during the period must be salvaged at a loss, regular selling price of the item is
greater than the cost and the cost is greater than the salvage value, and the demand during
the period is probabilistic. We are using the following notations to summarise the related
work.
 Buy-back policy for supply chain coordination: a simple rule 5

c unit cost of producing or purchasing

p selling price per unit
g goodwill cost per unit in case of stock-out
s salvage value per unit
Cu unit cost of understocking or an opportunity loss associated with understocking
Co unit cost of overstocking or an opportunity loss incurred by overstocking
X random variable representing demand
F(χ) cumulative probability distribution of demand
Q number of items ordered or stocked
Q* optimal order quantity
CSL cycle service level
CSL* optimal cycle service level or critical fractile.
The opportunity cost of understocking an item consists of two components. The first
component is the loss of profit (p – c) per unit and the second component is the incurred
goodwill loss (Chopra and Meindl, 2013). Therefore, Cu = p – c + g. The cost of
overstocking is the difference between cost of an item and the salvage value. Therefore,
Co = c – s. The optimum order quantity, Q*, can be determined by finding the point of
indifference i.e., a stocking level where the expected opportunity loss from understocking
is equal to the expected opportunity loss of overstocking. The most profitable order
quantity Q* is the demand level where the cumulative probability (or area to the left in
the case of continuous distributions) is equal to the critical fractile CSL* (Chopra and
Meindl, 2013).

3.1.1 Finding expected value of performance measures

The optimal order quantity obtained using the critical fractile method, described above,
maximises the expected profit per period. The performance measures of interest are: E
(number of units sold); E (number of units overstocked) or E (overstock); E (number of
units understocked) or E (understock); E (Profit). Before examining the formulas for
finding these performance measures, it is interesting to note the definitions and
relationships between these performance measures, if μ is the mean demand per period.

E (overstock) = E ( (Q − X) X < Q )

E (understock) = E ( (X − Q) X > Q )

E (number of units sold) = Q − E (overstock)

= μ − E (understock)

E (profit) = (p − c) ⋅ E (number of units sold) − g E (understock)

−(c − s) E (overstock)
6 R. Tibrewala et al.

For simplicity, it is assumed that the goodwill cost, g = 0 and the probability distribution
of demand per period is Normal with mean μ, and standard deviation σ.
Let Z* be the critical value of standard normal random variable Z where the area to
the left of Z* is equal to CSL* or Z* = (Q* – μ) / σ.
Let fs (x) = standard Normal probability density function. We can then conclude the
following:
Q = F−1 (CSL) = NORMINV (CSL, μ, σ)

Z = FS−1 (CSL) = NORMINV (CSL, 0, 1)

Q* = F−1 (CSL)* = NORMINV (CSL*, μ, σ)

Z* = FS−1 (CSL)* = NORMINV (CSL*, 0, 1)

According to the equations developed by Chopra and Meindl (2013)

E (overstock) = (Q − μ) ⋅ CSL + σ f s (z)

E (understock) = (μ − Q) ⋅ (1 − CSL) + σ fs (z)

Using these two relationships, it is easy to develop expressions for E (number of units
sold) and E (Profit) as shown below:
E (number of units sold) = μ − E (understock)
=Q* − E (overstock)

E (Profit) = (p − c) ( E(number of units sold) − (c − s) E (overstock)

E (Profit) = (p − c) ( Q* − E (overstock) ) − (c − s) E (overstock)

= (p − c) Q* − (p − c + c − s) E (overstock)
= (p − c) Q* − (p − s) E (overstock)
= (p − c) Q* − (p − s) ( (Q* − μ) CSL* + σ f s (z) )
= (p − c) Q* − (p − s) (Q* − μ) CSL* − (p − s) σ f s (z)
= (p − c) Q* − (Q* − μ) (p − c) − (p − s) σ f s (z)

Note that (p – s) CSL* = (p – c)] = (p – c) μ – (p – s) σ fs (z).

Intuitively, this relationship for Expected Profit implies that a unit profit of (p – c) is
earned on the entire average demand, and in the case of overstock, the revenue earned is
only s rather than p for each unit.

3.2 Channel coordination and supply chain profit maximisation

Jeuland and Shugan (1983) have investigated channel coordination conditions for a
simple supply chain consisting of a retailer and a supplier with deterministic demand.
Monahan (1984) addressed the same channel coordination problem by finding the price
discounts that a supplier can offer to a customer for increasing order quantities in a
deterministic demand environment. In past one decade, a large number of studies have
been conducted in this area considering various types of supply chain contracts
 Buy-back policy for supply chain coordination: a simple rule 7

(Lariviere, 1998; Qi et al., 2004; Gan et al., 2004; Sarmah et al., 2006; Li and Wang,
2007; Choi et al., 2008; Ruo et al., 2013; Cao et al., 2013; Xu et al., 2014; Liu et al.,
2014).
Ozen et al. (2012) studied the coordination issue between manufacturer and multiple
retailers through three parameter buy-back contract. They showed that a buy-back
contract can coordinate the supply chain under symmetric margins of the retailer.
Becker-Peth et al. (2013) examined the retailer’s order behaviour under a buy-back
contract through a series of lab experiments and compared the results against a wholesale
contract. Their experiments show that individual factors, such as anchoring effect, loss
aversion, and revenue evaluation, can be used to estimate how the retailer’s order
quantity decision changes with contract parameters. Wu (2013) examined supply chain
coordination problem using a buy-back contract and analyse the impact of the buy-back
policy on retail price and the order quantity. This study also found that a buy-back
strategy can lead to a higher profit than a non-buy-back policy under vertical integration.
Tang and Kouvelis (2014) studied a single supplier and single retailer supply chain
coordination problem under supply uncertainty. They showed that a buy-back and
revenue sharing contract can coordinate the supply chain effectively under uncertainty.
Ren et al. (2015) studied coordinating mechanism in a two-stage supply chain which
consist of a single manufacturer and multiple retailers. They showed that using a
buy-back contract with flexible profit allocation can coordinate the supply chain
perfectively.
The paper most relevant to the research on buy-back is the one published by
Pasternack (1985). Pasternack showed the conditions for channel coordination and
optimal supply chain profit. A summary of relevant results can be presented using the
following symbols.
v variable cost per unit incurred by the supplier.
c wholesale cost per unit paid by the retailer to the supplier.
s salvage value of unsold merchandise per unit.
b buy-back per unit paid by the supplier to the retailer for unsold units.
p retail selling price per unit.
ERP expected value of retailer’s profit.
ESP expected value of supplier’s profit.
ETP expected value of total supply chain profit.
For simplicity, the following assumptions are being made:
1 salvage value s is the same whether the retailer or the supplier salvages the
merchandise
2 variable cost v includes all shipping and item manufacturing or procurement costs
3 goodwill cost is zero
4 there is no limit on the proportion of items that may be returned by the retailer back
to the manufacturer
8 R. Tibrewala et al.

5 s<v<c<p
6 s<b<c<p
7 demand follows a Normal distribution with mean μ and standard deviation σ.
Based on these assumptions, Pasternack (1985) presented four different scenarios as
discussed in following sub-sections.

3.2.1 Supplier and retailer being the same entity

If the supplier and the retailer are the same entity, then, according to the relationships
shown in the single period model, the results will be as follows.
Cu = p − v

Co = v − s

CSL* = (p − v) (p − s)

Z* = Fs −1 (CSL*)

Q* = F−1 (CSL*)

ETP* = (p − v)μ − (p − s)σ fs (Z*)

Pasternack (1985) has shown that the value of ETP* obtained above is the highest
expected profit that can be generated by the supply chain.

3.2.2 Retailer’s decision without buy-back

If there is no buy-back, then the retailer will place orders using the following
relationship:
Cu = p − c

Co = c − s

CSL* = (p − c) (p − s)

Z* = Fs −1 (CSL*)

Q* = F−1 (CSL*)

ERP* = (p − c)μ − (p − s)σ fs (Z*)

ESP* = (c − v)Q*

ETP* = (c − v) Q* + (p − c)μ − (p − s)σ fs (Z*)

Pasternack (1985) has provided a proof that a policy with no buy-back can never
maximise the total supply chain profit.
 Buy-back policy for supply chain coordination: a simple rule 9

3.2.3 Retailer’s decision with buy-back

Cu = p − c

Co = c − b

CSL* = (p − c) (p − b)

Z* = Fs −1 (CSL*)

Q* = F−1 (CSL*)

ERP* = (p − c)μ − (p − b)σ f s (Z*)

ESP* = (c − v)Q* − (b − s) (Q* − μ) CLS* − (b − s) σ f s ( Z*)

ETP* = (p − c) μ + (c − v) Q* − (b − s) (Q* − μ) CLS* − (p − s)σ fs (Z*)

Note that as the wholesale cost c to the retailer and the buy-back price b changes, the
retailer’s order quantity Q* changes and all three expected profits ERP, ESP, and ETP
also change.

3.2.4 Decision in a coordinated channel

The basic concept of a coordinated channel involves a combined decision making process
by supplier and retailer (Cachon, 2003). The major decision made by the supplier is the
wholesale price c to be charged to the retailer and the buy-back price b to be paid back to
the retailer for unsold items. The major decision made by the retailer is Q* or the number
of units to put on the shelf for sale to customers. In a coordinated channel, the decisions
made by the supplier and the retailer, are such that the supply chain profit is maximised.
The relationship developed by Pasternack (1985) for channel coordination can be
expressed as follows: (p – c) (p – s) = (p – v) (p – b). If the supplier sets the value of c
and b so that the above relationship holds, then the supply chain profit will be maximised.
This condition can be easily derived in an intuitive manner. For the channel to be
coordinated, the value of Q* (or CSL*), for the retailer, should be the same as that for the
supplier managing the retail business.
For supplier and retailer as the same entity: CSL* = (p − v) (p − s)

For independent retailer decision: CSL* = (p − c) (p − b)

Therefore, in a coordinated channel CSL* should be same:

(p − v) (p − s) = (p − c) (p − b)

This expression is the same as the channel coordination condition developed by

Pasternack (1985). By choosing b and c to meet this condition, the supplier can force the
retailer to make the same buying decision Q*. It is possible for many different sets of
values of b and c to meet this condition.
10 R. Tibrewala et al.

3.3 Expected profit in a coordinated channel

Pasternack (1985) has developed the following expected profit relationships for a
coordinated channel in a normally distributed demand environment.
ERP* = (p − c)μ − σ(p − b) f s (Z*)

ESP* = (c − v) μ − σ (b − s) f s ( Z*)

ETP* = (p − v) μ − σ(p − s) fs (Z*)

Note that: ETP* = ERP* + ESP*

In a coordinated channel, as the wholesale cost c and/or buy-back price b change, the
retailer and the supplier’s profit will change, but the total supply chain profit will remain
the same. Setting different levels of b and c will lead to different division of supply chain
profit between the retailer and the supplier.

3.4 Selecting a buy-back policy

As shown above, the supplier can control the buying behaviour of the retailer by setting
the wholesale cost c and buy-back price b. The range of buy-back price b can be as low
as the salvage value s or as high as the wholesale cost c. As the buy-back price is
increased, the wholesale cost c must also be increased to maintain the channel
coordination relationship:
(p − c) (p − s) = (p − v) (p − b)

As long as this relationship is maintained, the value of Q* ordered by the retailer will not
change and the total supply chain profit will remain optimal. Pasternack (1985) also
showed that if the buy-back price is at the low end of the feasible region, then the
wholesale cost c must also be lower. This, in turn, will cause the profit for the retailer to
be higher compared to that for the supplier. As the buy-back price b and the wholesale
cost c are increased the supplier will be getting a larger portion of the supply chain profit.
A buy-back policy designed to maximise supply chain profit may be difficult to
implement in an existing uncoordinated environment. Jeuland and Shugan (1983) showed
that neither the retailer nor the supplier would be willing to accept less profit after
coordination than before coordination. Therefore, in order to facilitate a smoother
transition towards channel coordination, the supplier needs to select values of c and b so
that the expected profit for the retailer also increases. It is quite possible that in an
existing uncoordinated environment the profit for the retailer is significantly higher than
that for the supplier. In such instances, an attempt to achieve channel coordination may
result in lower expected profit for the supplier, even though the supply chain profit is
maximised. The only possible rationale for accepting a lower proportion of expected
profit by the supplier is the potential increase in average sales of the product resulting
from increased order quantities from the retailer and from the possibility of opening
additional outlets.
 Buy-back policy for supply chain coordination: a simple rule 11

3.5 Implementation issues and gaps in the literature

Both the mean and the variability of the demand faced by the retailer greatly impact the
profit of both the supplier and the retailer. In implementing a coordinated buy-back price
b and wholesale cost c policy, the supplier needs to address several other issues and make
decisions about b and c accordingly. It is evident from the literature that the procedure for
solving the single period problem is standard. This procedure can be applied to the cases
where a retailer is independently making the ordering decision with or without a
buy-back policy, and to the cases where a single entity is both manufacturing and
retailing.
The relationship for finding expected profits for both the retailer and the supplier (or
manufacturer) has been studied by several authors (Lariviere, 1998; Qi et al., 2004; Gan
et al., 2004; Li and Wang, 2007; Choi et al., 2008; Ruo et al., 2013; Xu et al., 2014; Chen
et al., 2014). Chopra and Meindl (2013) showed that the buy-back price b should be a
fraction (between 0 and 1) of the wholesale cost c. Pasternack (1985) provides a channel
coordination relationship that maximises the supply chain profit. Pasternack (1985)
further concludes that both b and c must change simultaneously to maintain channel
coordination, and different sets of values of b and c will provide a different division of
profit between supply chain partners. Several other articles also discuss the benefits of
revenue sharing and coordination between supply chain partners (Chopra and Meindl,
2013; Feng et al, 2014).
However, the literature review did not yield any articles that provide analytical
guidelines for constructing revenue sharing, cost sharing, or profit sharing arrangements
between the supplier and retailer. Another area ignored in literature is finding the
standard deviation of profits earned by supply chain partners.

4 Proposed model and solution procedure

“Sharing risks and rewards in the same proportion will always lead to a coordinated
channel thereby maximising supply chain profit”. According to this rule, if any supply
chain member, i.e., the retailer, realises 80% of the profit from units that are sold, then
the retailer should also be responsible for 80% of the losses incurred from unsold units.
Before looking at the proof for the general case, consider the situation where all risks and
rewards are shared 50% each between the retailer and the supplier.
Supply chain profit from units sold = p − v

Supply chain loss from unsold units = v − s

Therefore,
c = v + ½(p − v) = ½(p + v)

b = c − ½(v − s) = ½(p + v) − ½(v − s) = ½(p + s)

Substituting these values of b and c in the channel coordination condition rules gives the
following:
(p − c) (p − s) = (p − v) (p − b)
12 R. Tibrewala et al.

( p − ½ p − ½v ) (p − s) = (p − v) ( p − ½ p − ½s )
½(p − v) (p − s) = ½(p − v) (p − s)

Hence, sharing profits and losses equally, maintains channel coordination. To prove this
rule for a more general case, assume that the ratio of profit (p – v) on sold units shared by
the supplier is r and the ratio shared by the retailer is (1 – r). Then, using the same
proportion sharing rule:
c = v + r (p − v)

b = c − (1 − r) (v − s)
= v + r (p − v) − (1 − r) (v − s)
= v+r p−r v−v+s+r v−r s
= r p+s−r s
= s + r (p − s)

Once again substituting the values of b and c in the channel coordination rule shows:
(p − c) (p − s) = (p − v) (p − b)

(p − v − r p + r v) (p − s) = (p − v) (p − s − r p + r s)

(1 − r) (p − v) (p − s) = (p − v) (p − s) (1 − r)

This proves that if the manufacturer receives the same proportion of reward and the risk,
then the supply chain is coordinated and the supply chain profit will be maximised.
“Another form of supply chain arrangement is Revenue Sharing. Once again, the rule
developed in this research requires that a supply chain member, say the retailer, should be
assigned the same ratio of revenues as the costs”. Assume that this ratio = r
Retailer’s share of selling price = r p

Retailer’s share of variable cost = r v

Wholesale cost c = p − r p + r v

Buy-back price b = c − r (v − s)
= p−r p+r v−r v+r s
= p−r p+r s

Substituting these values of b and c in the channel coordination relationship shows:

(p − c) (p − s) = (p − v) (p − b)

(p − p + r p − r v) (p − s) = (p − v) (p − p + r p − r s)

r (p − v) (p − s) = r (p − v) (p − s)
 Buy-back policy for supply chain coordination: a simple rule 13

This proves that if a channel member shares revenue and costs in the same proportion, the
supply chain profit is maximised. It is important to note that as c and b are increased,
more profit will be diverted towards the supplier. The sensitivity analysis is shown along
with an example in the next section.

5 Numerical experiment

We consider a product with a retail-selling price of $13.00, variable cost to supplier or

manufacturer is $5.00, and the salvage value of an unsold item is $3.00. According to the
above data: p = 13, v = 5, and s = 3. If the manufacturer is also the retailer then
CSL* = (p – v) / (p – s) = 8 / 10 = 0.80. It is also assumed that the demand follows
normal distribution with μ = 1000 and σ = 200. The economic order quantity Q* = 1,168
and the ESP = ETP = $7,440.08. Note that the channel is coordinated, since there is only
one member in the supply chain and the expected supply chain profit ETP is maximised.
Under this condition, 1,168 units (Q*) are available to the retail customers for purchase.

5.1 Uncoordinated channels

Suppose that the retailer is not the manufacturer and makes the order quantity decision
independently without any buy-back policy. The quantity ordered by the retailer will
depend on the retailer’s cost c. The retailer will use critical fractile CSL = (p – c) / (p – s)
to make the buying decision. If the manufacturer changes its wholesale cost c from 5 to
11 (assuming that none of the two parties will want to operate at a loss on a per unit
basis), the CSL for the retailer will change 0.8 to 0.2 and the order quantity will change
from 1,168 to 832 items (see Table 1).
The results presented in Table 1 shows that critical fractile has the highest value when
the channel is coordinated and the order quantity is also the maximum. The expected
sales and the expected supply chain profit are also maximised at that point. Further, as the
wholesale cost c to the retailer increases, the E (overstock) goes down, E (understock)
goes up, E (sales) goes down, and the E (supply chain profit) goes down. Similarly, at a
wholesale cost c of $11, the CSL drops from 0.8 to 0.2, Q* drops from 1168 to 832, E
(sales) drop from 977.61 to 809.62, and the supply chain ETP drops from $7,440.68 to
$6,432.00. The retailer profit obviously shows a dramatic drop from $7,440.68 to
$1,440.08. Without channel coordination, the only way a manufacturer or a supplier can
maximise ETP and the quantity available for sale to retail customers, is to sell the product
to the retailer at cost v. This is obviously not a feasible long-term solution for the
maximisation of sales and supply chain profits.
A coordinated channel can accomplish these two objectives (maximise ETP and Q
available to retail customers) by choosing a proper combination of b and c as shown in
Table 2 and it also allows the supplier to make a profit.
 14

Table 1

Selling price p 13 13 13 13 13 13 13 13 13 13 13 13 13
R. Tibrewala et al.

Retailer’s cost c 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11

Retailer’s salvage value s 3 3 3 3 3 3 3 3 3 3 3 3 3
Supplier variable cost v 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Optimal service level CSL: 0.8 0.75 0.7 0.65 0.6 0.55 0.5 0.45 0.4 0.35 0.3 0.25 0.2
Demand μ 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Demand σ 200 200 200 200 200 200 200 200 200 200 200 200 200
Order quantity Q 1,168 1135 1,105 1,077 1,051 1,025 1,000 975 949 923 895 865 832
Expected overstock 190.39 164.81 143.04 124.13 107.87 92.91 79.79 67.91 56.87 47.13 38.04 29.81 22.39
Expected understock 22.39 29.81 38.04 47.13 56.87 67.91 79.79 92.91 107.87 124.13 143.04 164.81 190.39
Expected sales 977.61 970.19 961.96 952.87 943.13 932.09 920.21 907.09 892.13 875.87 856.96 835.19 809.61
Expected retailer profit E(RP) 7,440.08 6,864.45 6,304.61 5,759.20 5,227.31 4,708.39 4,202.12 3,708.39 3,227.31 2,759.20 2,304.61 1,864.45 1,440.08
Expected supplier profit E(SP) 0.00 567.50 1,105.00 1,615.50 2,102.00 2,562.50 3,000.00 3,412.50 3,796.00 4,153.50 4,475.00 4,757.50 4,992.00
Expected chain profit E(TP) 7,440.08 7,431.95 7,409.61 7,374.70 7,329.31 7,270.89 7,202.12 7,120.89 7,023.31 6,912.70 6,779.61 6,621.95 6,432.08
Uncoordinated ordering from retailer based on different wholesale costs
 Buy-back policy for supply chain coordination: a simple rule 15

Table 2 Coordinated channel

Supplier profit 50% 25% 75%

Retailer profit 50% 75% 25%
Salvage value s 3 3 3
Variable cost v 5 5 5
Wholesale cost c 9 7 11
Buy-back price b 8 5.5 10.5
Selling price p 13 13 13
Demand mean 1,000 1,000 1,000
Demand std. dev. 200 200 200
Critical fractile = 0.8 0.8 0.8
Order quantity = 1,168.324 1,168.324 1,168.324
Channel coordination conditions
(p – c) × (p – s) = 40 60 20
(p – v) × (p – b) = 40 60 20
Expected retailer profit = 3,720.038 5,580.057 1,860.019
Expected supplier profit = 3,720.038 1,860.019 5,580.057
Expected supply chain profit = 7,440.076 7,440.076 7,440.076

5.2 Coordinated channels

Three scenarios are shown in Table 2. The first scenario is where both the supplier and
the retailer share 50% of the rewards and the risks. The values of c and b for this scenario
are $9.00 and $8.00 respectively. Note that at a $9.00 wholesale cost, both the supplier
and the retailer are realising a profit of $4.00 on the units sold, and at a buy-back price of
$8.00, both parties are losing $1 on overstocked items. In other words, the total potential
profit of $8.00 or (p – v) is split equally, and the total potential loss of $2.00 or (v – s) is
also split equally. The expected profit for both parties is $3,772.04 and the channel
coordination condition (p – c) (p – s) = (p – v) (p – b) is satisfied.
The second scenario shows a 25% share by the supplier. In this case b = $5.50 and
c = $7.00. The supplier is realising only $2 out of a possible $8 profit and is losing only
$0.50 out of $2.00 on unsold items. The supplier’s expected profit is only 25% of the
supply chain profit, whereas the retailer’s profit is 75% of the supply chain profit. Note
that the channel is still coordinated and the supply chain profit is still $7,440.08.
Similarly, the third scenario shows a coordinated channel arrangement where the supplier
is realising 75% of the profit and is taking 75% of the risk. In all three cases, the quantity
for sale to customers’ remains at 1,168 units and the supply chain profit remains at
$7,440.08.
This example shows that the supplier can adjust b and c to induce the retailer to agree
to channel coordination. The most likely arrangement will be to set values of b and c so
that the retailer’s profit stays at least the same as that for the uncoordinated environment.
For example, if the current c = $8.50, from Table 1 it can be seen that ERP = $3,708.39
and ESP = $3,412.50. By increasing c to $9.00 and establishing a buy-back price of
b = $8.00, both parties will have ERP = ESP = $3,770.04. If the retailer is not willing to
16 R. Tibrewala et al.

accept a higher c, then the supplier may be forced to pass on the bulk of the benefits
resulting from channel coordination to the retailer. The benefit to the supplier may still be
in the form of more merchandise being sold in the marketplace.

6 Simulation

In this section, we performed several simulations using Excel to assess the impact of
various parameters on the standard deviation of profits for supply chain partners in both
coordinated and uncoordinated environments.

6.1 Impact of demand uncertainty on expected profits

As the standard deviation of demand increases, the expected supply chain profit
decreases in both uncoordinated as well as coordinated environment. “It is interesting to
note that the results of mathematical formulas for finding the expected profit or overstock
and understock based on normally distributed demand do not apply when the standard
deviation of demand is too high compared to the mean”. The reason for this difficulty
stems from the fact that a negative demand is not feasible. During the simulation, it is
easy to control the lowest value of demand to be 0, but to find the mathematical formulas
where a normal demand has additional conditions is beyond the scope of this paper.
The analysis was therefore restricted to investigating demand standard deviation ranging
from 50 to 500 with mean being 1,000. The rest of the data remained the same
(p = 13, s = 3, v = 5). The results are shown in Table 3. The first column titled as degree
of coordination is defined as the ratio of (p – c) / (p – v). As discussed before if c = v,
then there is only one entity in the supply chain and the channel is coordinated. As the
cost c to the retailer keeps going up, the order quantity, without buy-back, continues to go
down, as shown earlier in Table 1, and the degree coordination becomes lower.
Table 3 Impact of demand uncertainty on expected profits

Degree of Demand standard deviation

coordination 50 100 200 300 400 500
1 7,860.02 7,720.04 7,440.08 7,160.11 6,880.15 6,600.19
0.9375 7,858.11 7,715.72 7,431.95 7,147.67 6,863.89 6,579.62
0.875 7,852.15 7,704.30 7,409.61 7,113.92 6,819.23 6,523.54
0.8125 7,843.30 7,688.10 7,374.70 7,062.80 6,749.40 6,437.50
0.75 7,832.82 7,663.66 7,329.31 6,992.97 6,656.63 6,322.29
0.6875 7,817.09 7,636.69 7,270.89 6,907.58 6,541.78 6,178.48
0.625 7,800.53 7,601.06 7,202.12 6,803.17 6,404.23 6,005.29
0.5625 7,781.09 7,558.69 7,120.89 6,679.58 6,241.78 5,800.48
0.5 7,754.82 7,513.66 7,023.31 6,536.97 6,050.63 5,560.29
0.4375 7,729.30 7,454.10 6,912.70 6,366.80 5,825.40 5,279.50
0.375 7,696.15 7,392.30 6,779.61 6,171.92 5,559.23 4,951.54
0.3125 7,654.11 7,313.72 6,621.95 5,935.67 5,243.89 4,557.62
0.25 7,608.02 7,216.04 6,432.08 5,648.11 4,858.15 4,074.19
 Buy-back policy for supply chain coordination: a simple rule 17

The results show that as degree of coordination decreases the expected total supply chain
profit continuously decreases. On the other hand, as the standard deviation of demand
goes up the expected supply chain profit goes down in both the coordinated and
uncoordinated cases. The increase in standard deviation seems to have a greater impact
on profit decrease in poorly coordinated channels.

Figure 1 Effect of demand uncertainty on profit (see online version for colours)
Profit Change versus Demand Uncertainty

8000.00
Sigma = 50
7500.00
Sigma = 100
7000.00
Supply Chain Profit

6500.00
Sigma = 200
6000.00
Sigma = 300
5500.00

5000.00
Sigma = 400
4500.00
Sigma = 500
4000.00

3500.00

3000.00
0 0.2 0.4 0.6 0.8 1 1.2

Degree of Coordination

Figure 1 clearly illustrates that as the standard deviation of demand increases the
expected supply chain profit decreases. The decrease in profit is more severe when the
channel is less coordinated. Channel coordination not only maximises the expected
supply chain profit but also minimises the impact of increasing demand uncertainty on
expected supply chain profit.

6.2 Impact of demand uncertainty on profit variability

Having analysed the impact of demand uncertainty on the expected profit resulting from
various degrees of coordination, the next step is to analyse the impact of this uncertainty
on the variability of profits as measured by standard deviation or coefficient of variation.
An examination of the mathematical relationship to develop the impact on profit
variability is beyond the scope of this paper. However, a series of simulations using Excel
have been performed in next section to analyse this impact.

6.3 Simulation process and scenarios

Five different scenarios dealing with different degrees of channel coordination were
evaluated. The first scenario was for the coordinated channel with the supplier share
being at a 50% level followed by the second coordinated scenario with a supplier share of
25%. The remaining three scenarios dealt with uncoordinated channels without buy-back.
18 R. Tibrewala et al.

The wholesale cost c was considered to be $7, $9 and $11, which in turn made the degree
of coordination to be 0.75, 0.50, and 0.25 respectively. For each scenario, five different
demand standard deviations (50, 200, 500, 800, and 1,100) are considered. The mean
demand for all cases was assumed to be 1,000 and a normal distribution was used to
generate simulated demand.
The Excel formula used for this purpose was NORMINV (CSL, mean, standard
deviation). One thousand trials were conducted and the same set of demand was used to
analyse each of the cases within each of the scenarios. If the resulting demand was
negative in any trial, it was changed to zero. Note that this adjustment caused the
simulated demand to follow a truncated normal distribution, which was significantly
different from the normal distribution especially when the mean demand is 1,000 and the
standard deviation of demand is 800 or 1,100.
For each of the five different standard deviation levels within each scenario, the
average profit, standard deviation of profit, and coefficient of variation were calculated
for the retailer, supplier, and supply chain (see Table A1 to A5 in Appendix). A summary
of simulation results is provided in Table 4. From Table 4, it is observed that the average
and standard deviation of demand observed in simulation are close to the real mean and
standard deviation in all cases when standard deviation is 500 or less. In cases involving
standard deviation of 800 and 1,100, the truncation process causes the simulated average
value of demand to rise and the simulated standard deviation of demand to fall, because
the negative demand values are being increased to zero.
In scenario 1 (coordinated channel with equal share) the average profit, the standard
deviation of profit, and the coefficient of variation are the same for both the retailer and
supplier. These results are intuitively obvious since the profit in each trial in each case is
exactly the same for both parties in the supply chain.
In scenario 2 (coordinated channel with 25% share for supplier and 75% for retailer)
the average profit and the standard deviation of profit, are three times more for the
retailer than that for the supplier. The coefficient of variation remains the same for both
parties at a given demand standard deviation and it increases as demand standard
deviation increases. These results are again intuitively obvious since the retailer’s profit
in each trial in each case is exactly three times that of the supplier’s profit.
In scenarios 3, 4, and 5, there is no buy-back and the supplier profit will remain the
same regardless of the demand faced by the retailer. The standard deviation of supplier’s
profit is therefore zero in all cases within these three scenarios. At each given level of
standard deviation, as the channels become less and less coordinated (i.e., degree of
coordination moves from 1 to .25) the quantity ordered by the retailer for sale to the
customer goes down and the expected supply chain profit goes down. The lower profit
numbers obviously lead to lower standard deviation of profits. The coefficient of
variation for the supply chain profit decreases along with the degree of coordination. This
result may sound counter intuitive, but it should be noted that the supplier has risk in
uncoordinated channels and the entire risk is absorbed by the retailer.
The lower expected overstock perhaps leads to lower coefficient of variation for the
supply chain. The most important result can be obtained by examining changes in the
retailer coefficient of variation resulting from lower degree of coordination at any given
standard deviation of demand. In all cases, as the retailer moves towards coordination,
not only the expected profit goes up but also the coefficient of variation goes down.
Therefore, it can be concluded that the higher degree of channel coordination leads to
lower coefficient of variation for the retailer’s profit.
 Table 4

Mean demand 1,000 1,000 1,000 1,000 1,000

Demand σ 50 200 500 800 1,100

Simulated avg. demand 999.17 996.70 995.94 1,029.17 1,093.20

Simulated demand σ 50.58 202.27 496.15 735.97 944.55
Demand coeff. of variation 0.051 0.203 0.498 0.715 0.864

Retailer Supplier Total Retailer Supplier Total Retailer Supplier Total Retailer Supplier Total Retailer Supplier Total
Scenario 1 – coordinated channels supplier share 50%
Average profit 3,924.24 3,924.24 7,848.48 3,697.07 3,697.07 7,394.14 3,263.57 3,263.57 6,527.13 3,000.04 3,000.04 6,000.08 2,890.55 2,890.55 5,781.10
Standard dev. 205.89 205.89 411.78 823.49 823.49 1,646.98 2,004.07 2,004.07 4,008.14 2,869.24 2,869.24 5,738.48 3,552.31 3,552.31 7,104.62
Coeff. of var. 0.052 0.052 0.052 0.223 0.223 0.223 0.614 0.614 0.614 0.956 0.956 0.956 1.229 1.229 1.229
Summary of simulation results

Scenario 2 – coordinated channels supplier share 25%

Averages 5,886.36 1,962.12 7,848.48 5,545.61 1,848.54 7,394.14 4,895.35 1,631.78 6,527.13 4,500.06 1,500.02 6,000.08 4,335.83 1,445.28 5,781.10
Standard dev. 308.84 102.95 411.78 1,235.24 411.75 1,646.98 3,006.10 1,002.03 4,008.14 4,303.86 1,434.62 5,738.48 5,328.46 1,776.15 7,104.62
Coeff. of var. 0.052 0.052 0.052 0.223 0.223 0.223 0.614 0.614 0.614 0.956 0.956 0.956 1.229 1.229 1.229
Scenario 3 – degree of coordination 0.75
Averages 5,802.45 2,026.00 7,828.45 5,210.16 2,102.00 7,312.16 4,067.46 2,254.00 6,321.46 3,264.61 2,406.00 5,670.61 2,769.93 2,58.00 5,327.93
Standard dev. 335.44 0.00 335.44 1,338.49 0.00 1,338.49 3,216.71 0.00 3,216.71 4,382.81 0.00 4382.81 5,134.25 0.00 5,134.25
Coeff. of var. 0.058 0.000 0.043 0.257 0.000 0.183 0.791 0.000 0.509 1.343 0.000 0.773 1.854 0.000 0.964
Scenario 4 – degree of coordination 0.50
Averages 3,805.20 3,948.00 7,753.20 3,220.90 3,796.00 7,016.90 2,094.36 3,492.00 5,586.36 1,307.55 3,188 4,495.55 828.91 2,884 3,712.91
Standard dev. 249.00 0.00 249.00 999.29 0.00 999.29 2,348.45 0.00 2,348.45 2,875.40 0.00 2,875.40 2,929.90 0.00 2,929.90
Buy-back policy for supply chain coordination: a simple rule

Coeff. of var. 0.065 0.000 0.032 0.310 0.000 0.142 1.121 0.000 0.420 2.199 0.000 0.640 3.535 0.000 0.789
Scenario 5 – degree of coordination 0.25
Averages 1,859.15 5,748.00 7,607.15 1,436.62 4,992.00 6,428.62 633.50 3,474.00 4,107.50 170.15 1,962.00 2,132.15 14.87 444.00 458.87
Standard dev. 155.30 0.00 155.30 621.07 0.00 621.07 1,356.86 0.00 1,356.86 1,104.71 0.00 1,104.71 281.25 0.00 281.25
Coeff. of var. 0.084 0.000 0.020 0.432 0.000 0.097 2.142 0.000 0.330 6.493 0.000 0.518 18.914 0.000 0.613
19
20 R. Tibrewala et al.

7 Conclusions and scope for future work

The focus of this paper was to examine the benefits of a buy-back policy in a two-stage
supply chain consisting of one supplier and one retailer. In two-stage supply chain, one of
the biggest challenges before the suppliers (or manufacturer) is how to set the buy-back
price and a wholesale cost so that the supply chain profit can be maximised. Erstwhile
literatures have used rigor mathematics to examine the issue. The specific contribution of
this paper is to fill this gap in supply chain coordination literature by developing very
simple rules to solve the aforementioned problem, which could be proven efficient
without the use of complex mathematics. A numerical experiment is conducted to
demonstrate the application of the proposed simple rule to solve the problem. Further,
several sensitivity analysis are performed to assess the impact of various parameters on
the expected profit of the supply chain. Based on the proposed rules, a set of buy-back
prices and the wholesale costs are determined to maximise the profit of a two-stage
supply for short-life products.
The results clearly demonstrate the benefits of channel coordination, which not only
maximises the supply chain profit but also helps the supply chain members to cope with
uncertain demand. Moreover, we have proposed the following rules with mathematical
proof.
Sharing risks and rewards in the same proportion will always lead to a coordinated
channel thereby maximising supply chain profit. This rule can also be used to quickly
develop revenue sharing arrangements between the retailer and the supplier.
As the standard deviation of demand increases the expected supply chain profit
decreases. The decrease in profit is more severe when the channel is less coordinated.
Channel coordination not only maximises the expected supply chain profit but also
minimises the impact of increasing demand uncertainty on expected supply chain profit.
The sensitivity analysis results show that in coordinated channels with equal share the
average profit, the standard deviation of profit, and the coefficient of variation remain the
same for both the retailer and the supplier. As the profit share for any party increases, the
standard deviation of profit and the coefficient of variation increase in the same
proportion. However, in uncoordinated channels, the coefficient of variation for the
retailer’s profit decreases as the degree of channel coordination increases.
These results present a clear economic evidence for both of the supply chain members
to work together to achieve channel coordination. Moving towards channel coordination
can help in buffering the impact of demand uncertainty. The proposed rules can help the
suppliers in quickly identifying the wholesale cost and the buy-back price to achieve
channel coordination. This paper only focuses on a two-stage supply chain coordination
problem. However, in reality, a supply chain includes several stages. Therefore, it will be
interesting to see the application of the proposed simple rules in an n-stage supply chain.

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 24

Demand mean 1,000 1,000 1,000

Demand std. dev. 50 200 500
Table A1

Critical fractile = 0.8 0.8 0.8

Appendix

Order quantity = 1,042 1,168 1,421

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 898 3,448 3,448 6,896 592 1,792 1,792 3,584 0 –1,421 –1,421 –2,842
2 0.2538 967 3,793 3,793 7,586 867 3,167 3,167 6,334 669 1,924 1,924 3,848
3 0.7461 1,033 4,123 4,123 8,246 1,132 4,492 4,492 8,984 1,331 5,234 5,234 10,468
R. Tibrewala et al.

4 0.7739 1,038 4,148 4,148 8,296 1,150 4,582 4,582 9,164 1,376 5,459 5,459 10,918
999 0.2678 969 3,803 3,803 7,606 876 3,212 3,212 6,424 690 2,029 2,029 4,058
1,000 0.8844 1,060 4,168 4,168 8,336 1,239 4,672 4,672 9,344 1,599 5,684 5,684 11,368
Averages 999.17 3,924.24 3,924.24 7,848.48 996.70 3,697.07 3,697.07 7,394.14 995.94 3,263.57 3,263.57 6,527.13
Standard dev. 50.58 205.89 205.89 411.78 202.27 823.49 823.49 1,646.98 496.15 2,004.07 2,004.07 4,008.14
Coeff. of var. 0.051 0.052 0.052 0.052 0.203 0.223 0.223 0.223 0.498 0.614 0.614 0.614
Demand mean 1,000 1,000
Demand std. dev. 800 1,100
Coordinated channels supplier share 50%

Critical fractile = 0.8 0.8

Order quantity = 1673 1,926

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 0 –1,673 –1,673 –3,346 0 –1,926 –1,926 –3,852
2 0.2538 470 677 677 1,354 271 –571 –571 –1,142
3 0.7461 1,530 5,977 5,977 11,954 1,728 6,714 6,714 13,428
4 0.7739 1,601 6,332 6,332 12,664 1,827 7,209 7,209 14,418
999 0.2678 504 847 847 1,694 319 –331 –331 –662
1000 0.8844 1,958 6,692 6,692 13,384 2,317 7,704 7,704 15,408
Averages 1,029.17 3,000.04 3,000.04 6,000.08 1,093.20 2,890.55 2,890.55 5,781.10
Standard dev. 735.97 2,869.24 2,869.24 5,738.48 944.55 3,552.31 3,552.31 7,104.62
Coeff. of var. 0.715 0.956 0.956 0.956 0.864 1.229 1.229 1.229
Notes: Results of simulating 1,000 trials with different levels of demand uncertainty.
Salvage value s = 3; variable cost v = 5; retailer cost c = 9; buy-back price b = 8; selling price p = 13.
Demand mean 1,000 1,000 1,000
Demand std. dev. 50 200 500
Table A2

Critical fractile = 0.8 0.8 0.8

Order quantity = 1,042 1,168 1,421

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit Demand ret profit Sup profit Tot profit
1 0.0207 898 5,172 1,724 6,896 592 2,688 896 3,584 0 –2,131.5 –710.5 –2,842
2 0.2538 967 5,689.5 1,896.5 7,586 867 4,750.5 1,583.5 6,334 669 2,886 962 3,848
3 0.7461 1,033 6,184.5 2,061.5 8,246 1,132 6,738 2,246 8,984 1,331 7,851 2,617 10,468
4 0.7739 1,038 6,222 2,074 8,296 1,150 6,873 2,291 9,164 1,376 8,188.5 2,729.5 10,918
999 0.2678 969 5,704.5 1,901.5 7,606 8,76 4,818 1,606 6,424 690 3,043.5 1,014.5 4,058
1000 0.8844 1,060 6,252 2,084 8,336 1,239 7,008 2,336 9,344 1,599 8,526 2,842 11,368
Averages 999.17 5,886.36 1,962.12 7,848.48 996.70 5,545.61 1,848.54 7,394.14 995.94 4,895.35 1,631.78 6,527.13
Standard dev. 50.58 308.84 102.95 411.78 202.27 1,235.24 411.75 1,646.98 496.15 3,006.10 1,002.03 4,008.14
Coeff. of var. 0.051 0.052 0.052 0.052 0.203 0.223 0.223 0.223 0.498 0.614 0.614 0.614

Demand mean 1,000 1,000

Demand std. dev. 800 1,100
Coordinated channels supplier share 25%

Critical fractile = 0.8 0.8

Order quantity = 1,673 1,926

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 0 –2,509.5 –836.5 –3,346 0 –2,889 –963 –3,852
2 0.2538 470 1,015.5 338.5 1,354 271 –856.5 –285.5 –1,142
3 0.7461 1,530 8,965.5 2,988.5 11,954 1,728 10,071 3,357 13,428
4 0.7739 1,601 9,498 3,166 12,664 1,827 10,813.5 3,604.5 14,418
Buy-back policy for supply chain coordination: a simple rule

999 0.2678 504 1,270.5 423.5 1,694 319 –496.5 –165.5 –662
1000 0.8844 1,958 10,038 3,346 13,384 2,317 11,556 3,852 15,408
Averages 1,029.17 4,500.06 1,500.02 6,000.08 1,093.20 4,335.83 1,445.28 5,781.10
Standard dev. 735.97 4,303.86 1,434.62 5,738.48 944.55 5,328.46 1,776.15 7,104.62
Coeff. of var. 0.715 0.956 0.956 0.956 0.864 1.229 1.229 1.229
Notes: Results of simulating 1,000 trials with different levels of demand uncertainty.
Salvage value s = 3; variable cost v = 5; retailer cost c = 7; buy-back price b = 5.5; selling price p = 13.
25
 26

Demand mean 1,000 1,000 1,000

Demand std. dev. 50 200 500
Table A3

Critical fractile = 0.6 0.6 0.6

Order quantity = 1,013 1,051 1,127

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 898 4,928 2,026 6,954 592 1,716 2,102 3,818 0 –4,508 2,254 –2,254
2 0.2538 967 5,618 2,026 7,644 867 4,466 2,102 6,568 669 2,182 2,254 4,436
3 0.7461 1,033 6,078 2,026 8,104 1,132 6,306 2,102 8,408 1,331 6,762 2,254 9,016
R. Tibrewala et al.

4 0.7739 1,038 6,078 2,026 8,104 1,150 6,306 2,102 8,408 1,376 6,762 2,254 9,016
999 0.2678 969 5,638 2,026 7,664 876 4,556 2,102 6,658 690 2,392 2,254 4,646
1,000 0.8844 1,060 6,078 2,026 8,104 1,239 6,306 2,102 8,408 1,599 6,762 2,254 9,016
Averages 999.17 5,802.45 2,026.00 7,828.45 996.70 5,210.16 2,102.00 7,312.16 995.94 4,067.46 2,254.00 6,321.46
Degree of coordination 0.75

Standard dev. 50.58 335.44 0.00 335.44 202.27 1,338.49 0.00 1,338.49 496.15 3,216.71 0.00 3,216.71
Coeff. of var. 0.051 0.058 0.000 0.043 0.203 0.257 0.000 0.183 0.498 0.791 0.000 0.509

Demand mean 1,000 1,000

Demand std. dev. 800 1,100
Critical fractile = 0.6 0.6
Order quantity = 1,203 1,279

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 0 –4,812 2,406 –2,406 0 –5,116 2,558 –2,558
2 0.2538 470 –112 2,406 2,294 271 –2,406 2,558 152
3 0.7461 1,530 7,218 2,406 9,624 1,728 7,674 2,558 10,232
4 0.7739 1601 7,218 2,406 9,624 1,827 7,674 2,558 10,232
999 0.2678 504 228 2,406 2,634 319 –1,926 2,558 632
1,000 0.8844 1,958 7,218 2,406 9,624 2,317 7,674 2,558 10,232
Averages 1,029.17 3,264.61 2,406.00 5,670.61 1,093.20 2,769.93 2,558.00 5,327.93
Standard dev. 735.97 4,382.81 0.00 4,382.81 944.55 5,134.25 0.00 5,134.25
Coeff. of var. 0.715 1.343 0.000 0.773 0.864 1.854 0.000 0.964
Notes: Results of simulating 1,000 trials with different levels of demand uncertainty.
Salvage value s = 3; variable cost v = 5; retailer cost c = 7; selling price p = 13.
 Demand mean 1,000 1,000 1,000
Demand std. dev. 50 200 500
Table A4

Critical fractile = 0.4 0.4 0.4

Order quantity = 987 949 873

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot Profit Demand Ret profit Sup profit Tot profit
1 0.0207 898 3,058 3,948 7,006 592 226 3,796 4,022 0 –5,238 3,492 –1,746
2 0.2538 967 3,748 3,948 7,696 867 2,976 3,796 6,772 669 1,452 3,492 4,944
3 0.7461 1,033 3,948 3,948 7,896 1,132 3,796 3,796 7,592 1,331 3,492 3,492 6,984
4 0.7739 1,038 3,948 3,948 7,896 1,150 3,796 3,796 7,592 1,376 3,492 3,492 6,984
999 0.2678 969 3,768.00 3,948.00 7,716.00 876 3,066.00 3,796.00 6,862.00 690 1,662.00 3,492.00 5,154.00
1,000 0.8844 1,060 3,948.00 3,948.00 7,896.00 1,239 3,796.00 3,796.00 7,592.00 1,599 3,492.00 3,492.00 6,984.00
Averages 999.17 3,805.20 3,948.00 7,753.20 996.70 3,220.90 3,796.00 7,016.90 995.94 2,094.36 3,492.00 5,586.36
Degree of coordination 0.50

Standard dev. 50.58 249.00 0.00 249.00 202.27 999.29 0.00 999.29 496.15 2,348.45 0.00 2,348.45
Coeff. of var. 0.051 0.065 0.000 0.032 0.203 0.310 0.000 0.142 0.498 1.121 0.000 0.420

Demand mean 1,000 1,000

Demand std. dev. 800 1,100
Critical fractile = 0.4 0.4
Order quantity = 797 721

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 0 –4,782 3,188 –1,594 0 –4,326 2,884 –1,442
2 0.2538 470 –82 3,188 3,106 271 –1,616 2,884 1,268
3 0.7461 1,530 3,188 3,188 6,376 1,728 2,884 2,884 5,768
Buy-back policy for supply chain coordination: a simple rule

4 0.7739 1,601 3,188 3,188 6,376 1,827 2,884 2,884 5,768

999 0.2678 504 258 3,188 3,446 319 –1,136 2,884 1,748
1,000 0.8844 1,958 3,188 3,188 6,376 2,317 2,884 2,884 5,768
Averages 1,029.17 1,307.55 3,188 4,495.55 1,093.2 828.91 2,884 3,712.91
Standard dev. 735.97 2,875.40 0.00 2,875.40 9,44.55 2,929.90 0.00 2,929.90
Coeff. of var. 0.715 2.199 0.000 0.640 0.864 3.535 0.000 0.789
Notes: Results of simulating 1,000 trials with different levels of demand uncertainty.
Salvage value s = 3; variable cost v = 5; retailer cost c = 9; selling price p = 13.
27
View publication stats
28

Demand mean 1,000 1,000 1,000

Demand std. dev. 50 200 500
Table A5

Critical fractile = 0.2 0.2 0.2

Order quantity = 958 832 579

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 898 1,316 5,748 7,064 592 –736 4,992 4,256 0 –4,632 3,474 –1,158
2 0.2538 967 1,916 5,748 7,664 867 1,664 4,992 6,656 669 1,158 3,474 4,632
3 0.7461 1,033 1,916 5,748 7,664 1,132 1,664 4,992 6,656 1,331 1,158 3,474 4,632
R. Tibrewala et al.

4 0.7739 1,038 1,916 5,748 7,664 1,150 1,664 4,992 6,656 1,376 1,158 3,474 4,632
999 0.2678 969 1,916.00 5,748.00 7,664.00 876 1,664.00 4,992.00 6,656.00 6,90 1,158.00 3,474.00 4,632.00
1,000 0.8844 1,060 1,916.00 5,748.00 7,664.00 1,239 1,664.00 4,992.00 6,656.00 1,599 1,158.00 3,474.00 4,632.00
Averages 999.17 1,859.15 5,748.00 7,607.15 996.70 1,436.62 4,992.00 6,428.62 995.94 633.50 3,474.00 4,107.50
Degree of coordination 0.25

Standard dev. 50.58 155.30 0.00 155.30 202.27 621.07 0.00 621.07 496.15 1,356.86 0.00 1,356.86
Coeff. of var. 0.051 0.084 0.000 0.020 0.203 0.432 0.000 0.097 0.498 2.142 0.000 0.330

Demand mean 1,000 1,000

Demand std. dev. 800 1,100
Critical fractile = 0.2 0.2
Order quantity = 327 74

Trial # Rand # Demand Ret profit Sup profit Tot profit Demand Ret profit Sup profit Tot profit
1 0.0207 0 –2,616 1,962 –654 0 –592 444 –148
2 0.2538 470 654 1,962 2,616 271 148 444 592
3 0.7461 1,530 654 1,962 2,616 1,728 148 444 592
4 0.7739 1,601 654 1,962 2,616 1,827 148 444 592
999 0.2678 504 654 1,962 2,616 319 148 444 592
1,000 0.8844 1,958 654 1,962 2,616 2,317 148 444 592
Averages 1,029.17 170.15 1,962 2,132.15 1,093.2 14.87 444 458.87
Standard dev. 735.972 1,104.714 0 1,104.71 944.551 281.254 0 281.254
Coeff. of var. 0.715 6.493 0.000 0.518 0.864 18.914 0.000 0.613
Notes: Results of simulating 1,000 trials with different levels of demand uncertainty.
Salvage value s = 3; variable cost v = 5; retailer cost c = 11; selling price p = 13.