Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2

DOI 10.1186/s40852-017-0054-3

RESEARCH Open Access

Effects to implement the open-innovation

coordinative strategies between
manufacturer and retailer in reverse supply
chain
Sungwook Yoon and Sukjae Jeong*

* Correspondence: sjjeong@kw.ac.kr
Business School, Kwangwoon Abstract
University, 26 Kwangwoon-gil
(447-1, Wolgye-dong), Nowon-Gu, A reverse supply chain, as a post-consumption activity, aims at extracting value from
Seoul 139-701, Korea products at end of their life cycle (Mafakher and Nasiri, Journal of Cleaner Production 59:
185–196, 2013). As well, company’s awareness is attracting increasing attention toward
sustainable business practices. Open-innovation is a typical example of coordinative
activity that a manufacturer should share a profits generated through reverse supply
chain with retailer. The aim of this paper provide insights toward open innovation
practice in sharing profits between two strategic partners, manufacturer and retailer to
maximize an individual profits as well as total profits concurrently in reverse supply chain.
For analyzing effects of open innovation strategies, we modeled reverse supply chain
environments using system dynamics approach and compared the gap of profits
between non-coordinative (decentralized) and coordinative activity. Three cooperative
contracts in terms of how to share the cost and profit between two parties are proposed
in this paper. Each contract was analyzed according to the following three contract
processes. The first stage is that manufacturer proposes contracts to retailer. The second
is that retailer evaluates proposed contracts and choices the best contract which can lead
to maximize its expected profit. Finally retailer and manufacturer adjust parameters of the
best contract for achieving mutual goal of supply chain. Through the experimental
results, we discuss best coordinative strategy between manufacturer and retailer in order
to maximize a profit in reverse SC.
Keywords: Reverse supply chain, Open innovation system dynamics, Contract
implementation procedure

Main text

· This paper reviews contract options available with manufacturer and retailer to
collect a higher return rate of used products from consumer
· We generated detailed procedures of contract implementation with three stages:
Proposition, Evaluation and Adjustment
· Manufacturer proposes contracts to retailer as follow: ‘Revenue sharing’, ‘Collect
payment support’ and ‘Transportation cost support’.
© The Author(s). 2017 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International
License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium,
provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and
indicate if changes were made.
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 2 of 13

· Retailer evaluates proposed contracts and selects the best contract which can
maximize its own profit.
· Manufacturer and retailer adjust parameters of the best contract for maximizing total
profit of supply chain

Introduction
Recently, as increasing the needs for activity to return used products from consumer
due to the environmental regulation, Firms’ interests and necessary for open innovation
of reverse supply chain have slightly been growth.
Reverse supply chain focuses on collecting products from customers and reusing them to
generate value. Open-innovation is a type of coordinative straggles that manufacturer
should share the profits generated through reverse supply chain with retailers. (Čirjevskis
2016; Leydesdorff and lvanova 2016; Yusr 2016). The value that reverse supply chains bring
is threefold: First, the manufacturer uses the returned products in a remanufacturing
process. Second, customer participation in the product return enables open innovation
among partners in the supply chain to have a chance to sell new products to participating
customers. Third, for auxiliary and consumable products dependent on another device, such
as printer ink on printers, the manufacturer can encourage customers to buy new products
rather than refurbish or refill used ones when the reverse supply chain is employed.
Because collecting used products to remanufacture for resale is increasingly important
for corporate profits, many companies explicitly cooperate in the concept of open
innovation with their customers. A participant in supply chain have tried to generate
firm’s value by cooperation with other participants within the same chain. Manufacturers
in particular are considering various cooperative strategies such as working with supply
chain partners, including retailers and third party logistics (3PL) companies, to increase
their used product collection rate (Savaskan et al. 2004).
Generally, various cooperation strategies with partners was done by various contrac-
tion methods such as benefit-sharing, sharing of burden of expense (Mafakheri and
Nasiri 2013; Govindan and Popiuc 2014; Li et al. 2014; Shi et al. 2016).
This paper reviews a few contract options available with manufacturer and retailer to
collect a higher return rate of used products from consumer in reverse supply chain.
When comparing of decentralized model (No sharing of benefit or cost with supply
chain partners), the effects of coordinative options will be tested in perspective of
individual by participant or total supply chain profits through simulation approach.
This paper focuses on understanding the detailed implementation procedure in deter-
mining the optimal contracts through the agreement between two partners, manufacturer
and retailer.

Literature review
Numerous contract forms have been studied, such as buy-back, quantity-flexibility,
revenue-sharing, price-discount, sales-rebate, and quantity-discount (wang 2002; Li et
al. 2009; Cachon and Lariviere 2005; Coltman et al. 2009; Seifbarghy et al. 2015). Most
of them focused on general supply chain model with a two-stage supplier and retailer.
However, a few that deal with the effects on contracts with participants in reverse sup-
ply chain model have been studied, to our knowledge. Thus, our literature review ex-
tended reverse supply as well as general supply chain in order to recognize the types of
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 3 of 13

contracts model and their distinct implementation. Gerchak and Wang (2004) reviewed
two difference types of contracts between retailer and suppliers. One scheme was a
vender management inventory with revenue sharing, and the other was wholesale-price
driven contracts. They explored the resulting components’ delivery quantities equilib-
rium in this decentralized supply chain and its implications for participants’ and total
expected profits. Through experiment, they indicated revenue sharing should be a best
option to supplier to maximize its own profits. Cachon and Lariviere (2005) studied the
revenue-sharing contracts in a traditional supply chain model with revenues deter-
mined by each retailer’s purchase quantity and price. Their recommend was that rev-
enue sharing coordinates a supply chain with a single retailer (i.e., the retailer chooses
optimal price and quantity) and arbitrarily allocated the supply chain’s profit. Through
comparing among alternative revenue sharing options that include a buy-back con-
tracts, price-discount contracts, quantity-flexibility contracts, sales-rebate contracts,
franchise contracts, and quantity discounts, they demonstrated revenue sharing is
equivalent to buybacks in the newsvendor case and equivalent to price discounts in the
price-setting newsvendor case.
Wang and Zipkin (2009) investigated how the behavior of participant’s decision making
affects the performance of supply chain under a two-stage supplier-retailer model. Under
buy back, they experimented for finding the particular viewpoints in both of when retailer is
as leader and supplier as leader. The results showed the case that supplier is as leader can be
dominated than the other in maximizing total system profits under same experimental con-
ditions. Kanda and Deshmukh (2009) presented an evaluation of wholesale price, buy back,
and quantity flexibility in relation to the decentralized case and in terms of performance
measures improvement under three-level supply chains with a single supplier, assembler,
and retailer. Kannan et al. (2012) investigated a series on contracts applied on the two
echelon supply chain and indicates that revenue-sharing contracts offer the highest profit
margins for the manufacturer.

Research model
Model procedure
As shown in Fig. 1, our research model greatly follows four steps.

1. Proposition
Step 1.1 for applying open innovation, manufacturer determines
coordinative contracts
In step 1.1, we design three open innovation-based coordinative strategies with
manufacturer and retailer; 1) revenue-sharing of manufacturer to retailer, 2)
manufacturer’s financial support for the collect payment to retailer (manufacturer’s
additional payment to retailer in order to accelerate return activity of retailer,
separately with base return fee), and 3) manufacturer’s support to transportation
cost paid by retailer.
Step 1.2 Manufacturer estimates its own expected profit, without open
innovation strategies above.
The experiment to estimate the individual profits of each of manufacturer and
collection performance for gaining the effects from excluding open-innovation.
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 4 of 13

Here, Excluding open innovation means that there is no cooperative contracts

between manufacturer and retailer. And they seek to achieve a goal of maximizing
its own profit. Here, the profit results under decentralization is used as allowance
maximum value when any contracts with manufacturer and retailer are done.
Step 2. Manufacturer determines the maximum allowance level of each
contract for estimating the level of open innovation activity with retailers
For contracts proposed by step 1.1, we determine the maximum range of
allowance that manufacturer can lead to financial support to retailer. Because
manufacturer expects to increase its own profits through the cooperation

Fig. 1 Contract procedures between manufacturer and retailer

Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 5 of 13

Fig. 2 The flow of reverse supply chain in print cartridge industry

(contract) with partner, the allowance maximum level of each cooperative

contract will be determined when its expected profit in the coordinative model
is larger than the expected profit in the decentralized model.
2. Evaluation
Step 3. Retailer evaluates three open innovation strategic proposed from
manufacturer, and then selects the optimal contract which can lead to best
expected profit
A manufacturer recommend retailer three open-innovation strategic
available and their allowance maximum level that will be offered to retailer.
She then, simulates its own profit effects when applying three contracts and
finally determines the best that the highest profit is expected, among
contracts.
3. Adjustment

Fig. 3 Profit structure of manufacturer and collecting firm under the decentralized
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 6 of 13

Fig. 4 Simulation model of decentralized reverse supply chain

Step 4. Both of two partners agree to change some of recycling fee offered
by implementing the open-innovation
After final decision of retailer, the detailed of best contract will be
proceeded with two partners. In cooperative supply chain, it is more
important to maximize total profits than an individual profit of each. Thus,
if retailer’s decision does not satisfy the maximization of total profits, we
assume that parameters of contract will be partially adjusted by the process
of agreement between partners. In this study, we consider the basic return
fee as adjustment parameter. From the initial basic return fee, we
experiment the change of total profits by smooth decrement of the value of
base return fee. We finally select the adjusted best return fee that maximize
the total profits and the corresponding maximum allowance level.

Table 1 Simulation basic data

Partner Variable Value Dimension
Retailer Unit Inventory Cost 0.05 $/Unit
Unit delivery Transportation Cost 300 $/Unit
Unit Collection Transportation Cost 6 $/Unit
Retailer price of new cartridge 11 $/Unit
Unit Refilling price by competition 6 $/Unit
Transportation Batch size for Retailer’s delivery to manufacturer 1000 Unit
Manufacturer Unit cost of Refurbishing 0.05 $/Unit
Unit inventory cost 0.05 $/Unit
Recycler’s Purchasing price 9 $/Unit
Unit recycling fee 4 $/unit
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 7 of 13

Fig. 5 Mechanism of customer return attractiveness

Fig. 6 Change of profit structure by coordination strategies

Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 8 of 13

Fig. 7 Causal loop diagram of the our study

A framework of reverse supply chain model

This study considered a reverse supply chain model in print cartridge industry. Figure 2
shows our model structure and flow between manufacturer and retailer.
We assumed that consumers who have used cartridge determine only whether to re-
turn or refill used cartridges into the retailer. Refilling payment usually is less expensive
rather than buying new one. If consumers decided to return used cartridge to the re-
tailer, retailer would offer collect payment to these customers. When a number of used
cartridge collected by retailer are reached at certain quantity, she transport them to the
manufacturer. She pays transportation cost for movement of collected cartridges. When
used cartridges are delivered to manufacturer, he should pay a unit recycling fee to re-
tailer. All used cartridges go through a sorting process, and based on their conditions,
they will be either remanufactured or considered for recycling of their material con-
tents and be resold them to customers (Mafakheri and Nasiri 2013). In this paper, for
the simplicity, we assume that a retailer is not responsible for reselling of the remanu-
factured cartridges.
Figure 3 shows profit structure of retailer and manufacturer. The retailer cost is com-
prised of inventory cost, reward paid to customer for used cartridge and transportation

Table 2 Profit estimation under the decentralized reverse supply chain in step 1
Decentralized Reverse Supply Chain
Retailer’s profit ($) Manufacturer’s profit ($) Total profit ($) Return rate (Unit)
68,393 1,126,350 1,194,743 168,800
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 9 of 13

Table 3 Profit estimation of coordinative strategy 1 (Incentive sharing)

Coordinative Reverse Supply Chain (Incentive sharing)
incentive sharing rate retailer profit ($) manufacturer profit ($) total supply chain profit ($) return rate (Unit)
0% 68,393 1,126,350 1,194,743 168,800
5% 70,907 1,145,300 1,216,207 175,700
10% 77,109 1,147,952 1,225,061 182,500
15% 86,414 1,155,750 1,242,164 189,400
20% 99,088 1,157,448 1,256,536 196,300
25% 116,349 1,141,808 1,258,157 203,100
30% 136,435 1,136,090 1,272,525 209,600
40% 192,858 1,080,581 1,273,439 223,500
60% 353,764 832,185 1,185,949 234,200
80% 568,686 468,092 1,036,777 235,000
100% 843,350 40,836 884,186 235,000

cost. Her revenue is the recycling fee paid by manufacturer. The manufacturer’s burden
includes inventory costs, remanufacturing process costs, and recycling fee paid to the
retailer. He creates revenue through sales for remanufactured and new cartridges.
Manufacturer would try to collect more used cartridges because remanufactured
product can reduce manufacturing cost of raw material. Therefore, Manufacturer
would propose contracts which are related to the financial support to retailer for
increasing the profit.

Simulation model
System dynamics model is used for analyzing coordination strategies in reverse supply
chain as shown in Fig. 4. Table 1 shows used data of manufacturer and retailer in simu-
lation model.
Customer’s return attractiveness1) as key important factor is based on the refilling
price, the new cartridge price and the retailer’s collect payment. We assumed that the
refilling price and the new cartridge price are fixed as a market price but, retailer’s
collect payment fluctuate.

Table 4 Profit estimation of coordinative strategy 2 (Revenue sharing)

Coordinative Reverse Supply Chain (Revenue sharing)
Revenue Sharing Retailer profit Manufacturer profit Total supply chain profit Return rate
Rate ($) ($) ($) (Unit)
0% 68,393 1,126,350 1,194,743 168,800
3% 79,784 1,150,740 1,230,524 180,800
5% 88,467 1,152,200 1,240,667 188,600
7% 97,468 1,160,760 1,258,228 196,400
10% 109,826 1,157,150 1,266,976 208,300
13% 125,956 1,155,800 1,281,756 220,000
15% 137,348 1,145,250 1,282,598 227,300
17% 169,685 1,111,500 1,281,185 230,600
20% 238,497 1,051,350 1,289,847 233,000
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 10 of 13

Table 5 Profit estimation of coordinative strategy 3 (Transportation cost sharing)

Coordinative Reverse Supply Chain (Transportation cost sharing)
Manufacturer’s support to retailer’s retailer manufacturer Total supply chain Return rate
transportation cost profit ($) profit ($) profit ($) (Unit)
0% 68,393 1,126,350 1,194,743 168,800
20% 72,350 1,127,892 1,200,242 171,100
40% 72,304 1,137,444 1,209,748 173,500
60% 72,990 1,162,050 1,235,040 175,800
80% 76,396 1,175,856 1,252,252 178,200
100% 77,868 1,198,200 1,276,068 180,300

Retailer’s collect payment is determined as shown in Fig. 5. If retailer’s unit profit is less
than zero, retailer does not offer collect payment to customer. Otherwise, the maximum
collect payment that retailer can offer to the customer, is calculated by new cartridge price
minus refilling price. Therefore, if retailer’s unit profit is less than maximum collect
payment, she offers certain of her revenue to customer.
Therefore, customer return attractiveness would be 100% if retailer offers maximum
collect payment to them. Otherwise, it will be the proportion that retailer’s incentive is
divided into maximum incentive.

Open-innovation strategies considered in this study

We consider three open-innovation corporative strategies that manufacturer can propose
to retailer. First, manufacturer could support some of burdens that retailer should pay,
such as collect payment paid to customer and transportation cost for distribution of used
cartridge. Also, manufacturer can share a part of its revenue to encourage collection activ-
ity of retailer. Figure 6 shows structural variation of profit between manufacturer and re-
tailer for three coordinative strategies. As support rate for three contracts change,
Manufacturer’s profit would reduce but, retailer’s profit would increase as the rate.
Figure 7 shows a causal loop diagram of our reverse supply chain model. This dia-
gram shows influencing relationship between variables in our model. Generally, a
causal loop diagram is consisted of two feedback loop, one is reinforce feedback loop
as represented shape of plus and the other is negative feedback loop. Our diagram has
three negative feedback loops and two reinforce loops.
Each coordination strategy influences feedback loops. If incentive sharing strategy is
conducted, this strategy will influence to all feed loops. If revenue sharing strategy is
considered, this strategy will influence to number fours reinforce feed loop. If transpor-
tation cost sharing strategy is considered, this strategy will influence to number five
negative feed loop.

Table 6 Scope of sharing rate of coordination strategies

Coordinative Reverse Supply Chain strategies
Incentive Sharing Rate Revenue Sharing Rate Transportation cost sharing rate
0% ~ 30% 0% ~ 15% 0% ~ 100%
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 11 of 13

Table 7 Optimal sharing rate of coordination strategies based on collecting firm profit
Coordinative Reverse Supply Chain
Strategies Optimal Collecting Firm Manufacturer Total Supply Chain Return Rate
Rate Profit ($) Profit ($) Profit ($) (Unit)
Incentive Sharing Rate 30% 136,435 1,136,090 1,272,525 209,600
Revenue Sharing Rate 15% 137,348 1,145,250 1,282,598 227,300
Transportation cost 100% 77,868 1,198,200 1,276,068 180,300
sharing rate

Experiment design and results

Table 2 shows the results of step 1. In step 1, we found the individual profits of each of
manufacture and retailer in decentralized reverse supply chain model. The profit of
manufacturer and return rate of used cartridges was $1,126,350 and 168,800
respectively.
Tables 3, 4 and 5 demonstate experimental resutls for the proift change of when ap-
plying each of three typees of contract.. In case of incentive sharing, the acceptable
range of manufacturer was to 15%. This means that even if manufacturer share until
15% of customer incentive paid by retailer to customer, manufacture can expect a
higher profits over those of decentralized reverse supply chain (No incentive sharing).
In same way, experiments for two remaining contracts was also conducted. In case of
revenue sharing, the allowance maximum level of manufacturer was to 30%. This means
although manufacturer share until 30% of its own profit to retailer, manufacturer is able
to get the higher profit over $1,126, 350, its own profit in decentralized reverse supply
chain.
In case of manufacturer’s support for transportation cost paid by retailer, manufac-
turer’s allowance maximum level was all of costs. Even if manufacturer support all of
transportation cost to retailer, he can expect $71,850 (1,198,200 – 1,126,350) over
decentralized case. Table 6 shows the maximum allowance that manufacturer can pro-
vide its own profit to retailer by each of three contract strategies.

Table 8 The partial adjustment of 15% revenue sharing under the agreement of two participants
Manufacturer’s Revenue Sharing Rate (15%)
Adjustment Collecting Firm Profit Manufacturer Profit Total Supply Chain Profit Return Rate
rate ($) ($) ($) (Unit)
0% 137,348 1,145,250 1,282,598 227,300
1% 133,089 1,149,040 1,282,129 226,300
2% 127,598 1,147,420 1,275,018 224,900
3% 128,412 1,151,010 1,279,422 223,400
4% 126,618 1,149,110 1,275,728 221,700
5% 126,593 1,152,500 1,279,093 220,300
6% 123,124 1,150,320 1,273,444 218,800
7% 124,031 1,153,510 1,277,541 217,300
8% 121,596 1,160,350 1,281,946 215,800
9% 120,791 1,154,040 1,274,831 214,300
10% 118,958 1,160,600 1,279,558 212,800
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 12 of 13

In step 3, retailer will select the best that is highest of its own profits among above three
contracts and its allowance maximum level proposed by manufacturer (see Table 7). From
the results of experiment of step 3, the best contract was found that manufacturer share
15% of his revenue to retailer. In this case, the individual profits of manufacturer and re-
tailer was $ 1,145, 250 and $ 137, 348, respectively and return rate also was 227,300.
Table 8 figures out the results of step 4 procedure. In step 4, it is explained that the
partial adjustment of 15% revenue sharing under the agreement of two participants. As
mentioned in explanation of research model, we considered base return fee as adjusting
factor. As doing the smooth decrement of best return fee paid by manufacturer to
collection, we captured the change of the total profit (manufacturer profits, plus retailer
profit). From the results of experiment, we finally demonstrate that the point of maxi-
mizing total profits was to retain the existing value of base return fee.

Conclusions
In this paper, we propose the detailed open-innovation strategic decision procedure be-
tween manufacturer and retailer. For that, we first reviewed three open-innovation
strategies; (1) manufacturer’s revenue sharing, (2) manufacturer’s incentive support that
retailer pay to customer, (3) manufacturer’s support of transportation cost paid by
retailer.
We first tested whether open-innovation activity has a positive performance effects
that decentralized environment by comparing the gap of profits in two case. From the
results, to contract between two partners is superior to none between those. Also, in
process of contracting between two partners, we finally found the best contract and its
allowance maximum level. Above three contact methods, we demonstrate the best is
revenue-sharing that manufacturer share 15% of his profit to retailer in viewpoints of
maximizing total profits. Our future research is follows; through the expansion of the
current model, we additionally consider penalty costs from retailer. In current study,
we assumed that retailer always can meet manufacturer’s expected profits after
contracting with two partners. However, the sharing of revenue or cost support from
manufacturer can be just possible that manufacturer achieve his expected profits
through the increment of number of used cartridge returned by retailer. Thus, if
retailer doesn’t keep the promise of contract, manufacturer will require that collection
should pay the penalty costs to manufacturer.

Endnotes
1)
Mafakheri and Nasiri (2013). Revenue sharing coordination in reverse logistics.
Journal of Cleaner Production, 59, 185–196.

Acknowledgement
The present Research has been conducted by the Research Grant of Kwangwoon University in 2016.

Authors’ contributions
SW Data analysis, Simulation modeling and analysis. SJ Manuscript Writing, Idea Generation. Both authors read and
approved the final manuscript.

Competing interests
The authors declare that they have no competing interests.
Yoon and Jeong Journal of Open Innovation: Technology, Market, and Complexity (2017) 3:2 Page 13 of 13

Received: 31 July 2016 Accepted: 31 January 2017

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