Efficiency of non-compliance chargeback mechanisms in retail supply chains

In practice, suppliers fill retailers' purchase orders to the fill-rate targets to avoid the non-compliance financial penalty, or chargeback, in the presence of service level agreement. Two chargeback mechanisms — flat-fee and linear — have been proven to effectively coordinate the supply chain in a single-period setting. However, the mechanisms' efficiency, the incurred penalty costs necessary to coordinate the supply chain, have not been studied yet. Since retailers are often accused of treating chargeback as an additional source of revenue, this study compares the expected penalties resulted from the flat-fee or linear chargeback to shed light on the retailers' choice of mechanisms. Using experimental scenarios consisting of various demand functions, demand variabilities, and fill-rate targets, the simulation results offer counter-evidence to the accusation.