Coordination supply chain management in flexible production system and service level constraint: a Nash bargaining model

The interest conflicts significantly impact the supply chain (SC) functioning. Hence, it is imperative to establish a suitable coordination mechanism to eliminate the SC conflicts. This paper focuses on coordination in a two-member SC with a flexible production system under buyer's service level constraint and stochastic demand. The study adopts a multiple inspection policy and utilizes a discrete investment function for setup cost reductions. Bargaining is the fundamental subject of any business presently within the SC players to profit from a cooperative centralized model. The authors develop three SC models, a buyer Stackelberg model, a centralized decision model, and a Nash bargaining model. The cost allocation ratio with different bargaining powers gives a better representation of the cost-sharing scenario—Study attempt to associate bargaining with centralization and decentralization. Discrete investment helps to reduce the total cost further in the presence of a cost allocation ratio. A controllable lead time is used to relate the cost allocation ratio within the SC model. The model is solved analytically by a game-theoretic approach. Numerical example and sensitivity analysis are included to validate the proposed models. The results show the centralized cooperative model based on Nash bargaining significantly improves the overall profit of the SC. Therefore, when vendor and buyer cooperate to form a centralized SC, the SC can be optimized to achieve the dual objectives of increasing profit and improving customers’ service.