A three-echelon supply chain model with price and two-level quality dependent demand

This paper considers a three-echelon supply chain model with one supplier, one manufacturer and one retailer for trading a single product. We assume that the market demand at the retailer’s end is stochastic, but dependent on price and quality of the product. The final product’s quality depends on the manufacturing process and the raw material’s quality. We first develop models for centralized and decentralized scenarios. Then we try to coordinate the decentralized system with some contract mechanism. We show that revenue sharing contract is not able to coordinate the system, but a composite contract comprised of sales rebate and penalty (SRP) with return is able to coordinate the system. Finally, we illustrate the developed model with a numerical example and show the efficiency of SRP with return policy. We graphically show the effects of various model-parameters on the optimal decisions. Most of the existing literature’s focus on the quality of the finished product, but in this model we incorporate the quality of the raw material as a decision variable along with the finished product quality. We also able to coordinate the three echelon model with a composite contract which is seldom addressed in the existing literatures