Channel Coordination Under Generalized Transportation Costs

by

Aysegul Toptal
Texas A&M University 

In this study, we analyze the channel coordination problem between a buyer and a vendor considering a general replenishment cost
structure that includes a fixed setup cost as well as a stepwise freight cost. We study the corresponding single-period, i.e., Newsboy,
problem. Due to the nonrecurring nature of the Newsboy problem, vendor's replenishment quantity is determined by the buyer's order
quantity. Hence, there are opportunities for the vendor to achieve substantial savings from transportation costs by using an appropriate
pricing schedule to influence the buyer's ordering behavior. For this problem, we prove that the vendor's expected profits are not increasing
in buyer's order quantity. Using this nontraditional result, we identify the cases where the vendor can increase his/her profits either by
decreasing or increasing the buyer's order quantity. We prove several useful properties of the expected profit functions in the centralized
and decentralized solutions of the problem, and we utilize these properties to develop novel pricing schemes  which can be used by the
vendor to influence the buyer's order quantity.