Coordinating a two-level supply chain with delay in payments and profit sharing M.Y. Jaber a, * , I.H. Osman b a Department of Mechanical and Industrial Engineering, Ryerson University, 350 Victoria Street, Toronto, Ont., M5B 2K3, Canada b Information & Decision Systems, Olayan School of Business, American University of Beirut, P.O. Box 11-0236, Beirut 1107-2020, Lebanon Available online 4 August 2006 Abstract Achieving effective coordination among suppliers and retailers has become a pertinent research issue in supply chain management. Channel coordination is a joint decision policy achieved by a supplier(s) and a retailer(s) characterized by an agreement on the order quantity and the trade credit scenario (e.g., quantity discounts, delay in payments). This paper proposes a centralized model where players in a two-level (supplier–retailer) supply chain coordinate their orders to min- imize their local costs and that of the chain. In the proposed supply chain model the permissible delay in payments is con- sidered as a decision variable and it is adopted as a trade credit scenario to coordinate the order quantity between the two- levels. Computational results indicate that with coordination, the retailer orders in larger quantities than its economic order quantity, with savings to either both players, or to one in the supply chain. Moreover, a profit-sharing scenario for the distribution of generated net savings among the players in the supply chain is presented. Analytical and experimen- tal results are presented and discussed to demonstrate the effectiveness of the proposed model. Ó 2006 Elsevier Ltd. All rights reserved. Keywords: Supply chain coordination; Delay in payments; Extended credit periods; Order quantity; Distribution of savings (profit sharing) 1. Introduction Coordination schemes in supply chains are generally based on centralized and decentralized decision-mak- ing processes. In the case of a centralized decision-making process, there is a unique decision-maker that man- ages the whole supply chain. In this case, the main objective is to minimize (maximize) the total supply chain cost (profit). In the other case, the decentralized decision-making process involves multiple decision-makers in a supply chain, where each decision-maker tends to optimize his/her own performance leading to an inefficient system. To solve this inefficiency, a proper coordination mechanism should be adopted. Examples of such mechanisms include quantity flexibility contracts (Tsay, 1999), the payback/return policies (Emmons & Gil- bert, 1998), the payback agreements (Eppen & Iyer, 1997), and revenue sharing contracts (Giannoccaro & 0360-8352/$ - see front matter Ó 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.cie.2005.08.004 * Corresponding author. Tel.: +1 416 979 5000x7623; fax: +1 416 979 5265. E-mail address: mjaber@ryerson.ca (M.Y. Jaber). Computers & Industrial Engineering 50 (2006) 385–400 www.elsevier.com/locate/dsw