A surcharge pricing scheme for coordinating the supply chain of deteriorating products under the JIT environment

Abstract

We investigate the coordination of a supply chain of deteriorating products under the JIT environment. Deteriorating products lose their quality over time, and their inventory and production models have specific characteristics, different from the classical models. JIT includes several shipments in small sizes from a supplier to a buyer. For the buyer, JIT results in a decrease in inventory holding costs. However, for the supplier, it causes an increase in the number of setups, which increases the total cost. Consequently, the supplier is reluctant to participate in the JIT system, unless his/her loss is compensated. We propose a surcharge pricing in which the buyer offers the supplier an additional increase in wholesale price, and in return, asks him/her to switch to the JIT system. Numerical analyses indicate that this scheme is capable of fully coordinating the SC. The proposed scheme also has positive environmental impacts which are investigated.