Supply chain coordination with inventory risk allocation

Abstract

Unlike the traditional decentralized channel, the drop-shipping channel entails a retailer relaying consumers' orders to the manufacturer, which proceeds to stock the orders and directly ship them to the consumers. This study explores supply chain coordination and product quality in drop-shipping and traditional channels. Specifically, we analyze the performance of both channels under wholesale price and revenue-sharing contracts. Our study yields several key findings. First, the revenue-sharing contract can coordinate both traditional and drop-shipping channels, effectively increasing supply chain performance. Second, given the channel structure, the retailer prefers the wholesale price contract, whereas the manufacturer prefers the revenue-sharing contract. Third, product quality is higher in the drop-shipping channel when demand uncertainty is high. Finally, the implementation of the revenue-sharing contract increases product quality in the traditional channel, whereas it keeps product quality unchanged in the drop-shipping channel.