Coordination and profit sharing in a supply chain through compensation on disposal cost

Coordination among supply chain members is imperative for improving chain wide performance. In this paper, we focus on coordination and profit division in a two‐echelon supply chain that consists of a manufacturer and a retailer. The manufacturer supplies a perishable product to the retailer in a single lot. The product cannot be reworked and the retailer disposes it without any salvage value. A contract‐compensation on disposal cost of deteriorated products is proposed aiming at coordinating the chain. Two situations are explored. In the first, the players divide the surplus through bargaining that does not need any knowledge about the negotiation powers of the players, whereas in the second, the players divide the surplus through bargaining by applying their negotiation powers. Proposed mechanisms for coordination and surplus sharing are illustrated through a numerical example.