Purpose: The purpose of this paper is to set up the coordinating mechanism for a
decentralized distribution system consisting of a manufacturer and multiple independent
retailers by means of contracts. It is in the two-stage supply chain system that all retailers sell an
identical product made by the manufacturer and determine their order quantities which directly
affect the expected profit of the supply chain with random demand.
Design/methodology/approach: First comparison of the optimal order quantities in the
centralized and decentralized system shows that the supply chain needs coordination. Then the
coordination model is given based on buyback cost and compensation benefit. Finally the
coordination mechanism is set up in which the manufacturer as the leader uses a buyback policy
to incentive these retailers and the retailers pay profit returns to compensate the manufacturer.
Findings: The results of a numerical example show that the perfect supply chain coordination
and the flexible allocation of the profit can be achieved in the multi-retailer supply chain by the
buyback and compensation contracts.
Research limitations: The results based on assumptions might not completely hold in practice
and the paper only focuses on studying a single product in two-stage supply chain Practical implications: The coordination mechanism is applicable to a realistic supply chain
under a private information setting and the research results is the foundation of further
developing the coordination mechanism for a realistic multi-stage supply chain system with
more products.
Originality/value: This paper focused on studying the coordination mechanism for a
decentralized multi-retailer supply chain by the joint application of the buyback and
compensation contracts. Furthermore the perfect supply chain coordination and the flexible
allocation of the profit are achieved.
