Article ID: | iaor2009307 |
Country: | Netherlands |
Volume: | 111 |
Issue: | 2 |
Start Page Number: | 543 |
End Page Number: | 561 |
Publication Date: | Jan 2008 |
Journal: | International Journal of Production Economics |
Authors: | Topaloglu Huseyin, Kunnumkal Sumit |
Keywords: | discounts |
We consider a supplier and a customer operating under a service agreement that requires the supplier to cover the random customer demand with high probability. To fulfill the service agreement, the supplier carries a certain amount of safety stock. The customer has some bearing on its demand variability, possibly through activities such as acquiring advance demand information, employing more sophisticated forecasting techniques or smoothing its product consumption, but these activities bring an extra cost to the customer. Since a reduction in the customer demand variability helps the supplier reduce its safety stock, the supplier is willing to offer a price discount in exchange for reduced demand variability.