Two-level Supply Chain Coordination by Using an Insurance Contract under Returning Goods from Customer and Two-periodic Demand

One effective method for improving the performance of supply chain is making coordination among members of supply chain. This paper studies the subject of coordination of supply chain by using an insurance contract. The supply chain consists of one-manufacturer and one-retailer that the retailer is faced with potential demand and returning of goods from customer. Acceptance of goods returned is a common characteristic of existing competitive market and influences the subject of coordination. In this paper contractual parameters and sale price of goods of manufacturer are determined to achieve a full coordination and win-win condition for both members of supply chain. We compare this contract with revenue sharing contract. The results of research show that for any revenue sharing contract one insurance contract can be defined and in case of selecting contractual parameters properly the manufacturer’s expected profit with insurance contract is improved in relation to revenue sharing contract.