APEM jowatal Advances in Production Engineering & Management Volume 12 | Number 2 | June 2017 | pp 185-195 https://doi.Org/10.14743/apem2017.2.250 ISSN 1854-6250 Journal home: apem-journal.org Original scientific paper A study on the manufacturing decision-making and optimization of hybrid-channel supply chain for original equipment manufacturer Zhu, X.D.ab*, Li, B.Y.a, Wang, Z.a aNanjing University of Aeronautics and Astronautics, College of Economics and Management, Nanjing, P.R. China bNanjing University of Information Science and Technology, School of Economics and Management, Nanjing, P.R. China A B S T R A C T A R T I C L E I N F O OEM production model can achieve an effective integration of internal and external resources, and the brand owner's brand premium and manufacturer's production advantage are the key elements of the model. When manufacturers have both OEM channels and direct sales, the competition and cooperation relationships between them and the brand owners become even more complicated when the hybrid channels exist In order to better study the operation and management of the supply chains of OEM production with the hybrid channels, the operating conditions and optimization mechanism for the supply chain of OEM production with the hybrid channels were analyzed under both a centralized and decentralized decision making scenarios through the construction of a two-stage closed-loop supply chain model involving both manufacturers and brand owners. We found that the existence of hybrid channel depends on the brand owner's premium level which is limited by the manufacturer's production costs. There is a section on the premium level of brand owner and the hybrid channel exists in both a decentralized and a centralized decision making paradigms. By optimizing manufacturers' production costs and brand owner's premium level, the profits of both parties involved in the supply chain of OEM production with the hybrid channels, as well as the general profit of the system, can be improved. The system profit under a centralized decision making scenario is greater than that of a decentralized case. If the redistribution is made for the increase in the optimized system profit by leveraging the profit stratified ratio of OEM channels of a decentralized decision making approach, then there is a possibility of achieving the Pareto optimization. © 2017 PEI, University of Maribor. All rights reserved. Keywords: Manufacturing Supply chain Supply chain management Original equipment manufacturer Decision-making optimization *Corresponding author: zxd@nuist.edu.cn (Zhu, X.D.) Article history: Received 2 December 2016 Revised 15 April 2017 Accepted 17 April 2017 1. Introduction Globalization of market economic system, trade globalization and globalization of production and enterprises pose certain challenges (mainly competition in time and efficiency) while bringing about opportunities for contemporary enterprise development. OEM can achieve a chained alliance cooperation through "horizontal integration" to realize the goal of effective integration of internal and external enterprise resources. In channel selection, manufacturers are still adopting the "copycat culture" (initial brand) oriented direct sales channel and "brand culture" (powerful brand) oriented OEM channel as well as hybrid channel model of the two. Manufacturers open up direct sales channel in which they provide primary commodities (products lacking 185 Zhu, Li, Wang brand premium) directly to consumers while providing OEM service for branding business to dominate the OEM channel. This is the research context of this paper - OEM supply chain based on hybrid channels. We aim to answer three major questions in this paper: 1) under which circumstance should branding business and manufacturer establish a hybrid-channel OEM supply chain? 2) How a manufacturer chooses its channel cooperation candidates and the decisionmaking method based on the production advantages of the manufacturer and the level of brand premium of the branding business? 3) How to create the optimization mechanism according to the difference between its optimization objectives and those of its partner? The existing work in literature related to research problem of this paper is mainly focused on three aspects - OEM, hybrid channel and supply chain optimization. More Specifically, most work about OEM lay their emphasis on the transformation & upgrade of OEM mode and competitive strategies, which touched the issues regarding whether it's appropriate for manufacturers to initiatively give up brand creation and weaken market force, whether manufacturer can find a proper evolving process for brand development, and whether competition rules between OEMs can purely concentrate on production cost control, and how to evaluate the appropriateness of the input and output of the OEM mode. Hu Jun [1] taking OEMs in Pearl River Delta as examples, discussed about the pathway selection for sustainable growth OEMs from the prospective of the global value chain outsourcing system. It summarized the most common growth pattern - overall rise, individual ascending and horizontal spanning for OEMs. Many researchers[2-4] studied the decision-making problem between production and outsourcing of two OEMs which produce substitutable goods during the process of lowering manufacturing cost, and proposes that organizational flatness is an antecedence to the mass customization capability and the supply chain planning and corporation coordination mediates [5]. They found that with an increasing level of product substitutability, competition would drive the two OEMs to realize profit maximization by formulating low price and reducing investment cost. Moreover, outsourcing mechanism also warns OEMs not to rely on cost reduction to weaken cut-throat competition, but instead, they should pay more attention to enhance its ability as accessories supplier when providing outsourcing services. About hybrid channel, there are some literatures [6-8] established models to discuss about dual hybrid structural pattern of distribution channels - entity and network distribution channel of manufacturer and retailer, conducted game analysis respectively on the decentralized control and centralized control accompanied by numerical experiment, studied price competition strategies of manufacturer and distributor in order to guide pricing decision of dual hybrid channel distribution enterprises, and finally demonstrated the importance for manufacturer and retailer to concentrate on core competitive advantages to build and promote channel integration on expanding potential market capacity. Danand Agatz[9-10] aimed at the multi-channel supply chain composing of a retailer with a electronic channel, a manufacturer with a direct distribution channel. About decision-making optimization of supply chain, Scholars introduced the concept of effective inventory level, studied inventory control in supply chain coordination and cooperation process, and put forward that cost sharing contract could realize a win-win situation between supplier and buyer in the overall optimization [1113]. Galic [14] suggest and test evolutionary algorithm of multiple criteria solver (MCS) for asphalt supply chain optimization. Successful enterprise should reasonably balance quantity of self-made products and quantity of products entrusted to OEMs and reasonably select OEMs by relying on idea of overall benefit maximization in supply chain management and establishment of strategic partners [15]. Zhang [16] explore the optimization tactics of a dual-channel production and distribution network based on pre-sale mode to address the current situation of overstocked inventories in the apparel industry. This paper describes a two-level closed-loop supply chain consisting of one manufacturer and one branding business [17-19]. Under centralized decision-making pattern, it discusses whether hybrid-channel OEM supply chain could obtain an overall optimization when the manufacturer and the branding business carry out cooperative game, and whether participants could reach Pareto optimization based on profit compensation and contact sharing. Under decentralized decision-making scenario, our paper also discussed manufacturer and branding business to carry out non-cooperative game and explored whether they could obtain decision-making and prof- 186 Advances in Production Engineering & Management 12(2) 2017 A study on the manufacturing decision-making and optimization of hybrid-channel supply chain for original equipment... it optimization of system and participants through optimization of decision-making parameters. Through a comparison between the decentralized and centralized decision-making in hybridchannel OEM supply chain, it solved the operating conditions and optimization mechanism of hybrid-channel OEM supply chain. 2. Problem and symbols 2.1 Description of our research problem This paper described a two-level closed-loop supply chain consisting of one manufacturer and one branding business with the parameter conditions in dual channel selection under the requirements of production cost of manufacturer and brand premium ability of branding business. Hybrid-channel centralized decision-making I (Integrated Hybrid Channel) is shown in Fig. 1 and its channel environment can be described as follows. The manufacturer manufactures products at unit cost c and exploits direct sales channel and OEM channel. OEM channel forms seamless strategic alliance with branding business and sets the wholesale price as w1 = 0; the manufacturer and branding business, as a whole, conduct decision-making optimization and jointly formulate optimal prices p'0 and p'd of OEM channel and direct sales channel. In the aspect of market demand, under hybrid-channel centralized decision-making situation, market demand Qd of direct sales channel and market demand Q'0 of OEM channel are respectively expressed in the following demand functions: Qd = (a- bpfi+rUpi, -v)-p'd] (1) Q{, = [a- b(p'0 -v)]+r[p'd - {pi -v)] (2) Fig. 1 Channel structure - hybrid channel (centralized decision making) The manufacturer simultaneously explores the direct sales channel and OEM channel, namely hybrid channel as shown in Fig. 2. It is simply labeled as pattern H. The branding business in this pattern firstly proposes its profit level gH, the manufacturer makes decisions according to profit level of the branding business and its own unit production cost c, and then formulates optimal wholesale price wH of OEM channel and optimal price pf of direct sales channel to maximize its profit At this time, the market price of the branding business in OEM channel is p^ = wH + gH.In the aspect of market demand, the brand effect of branding business in OEM channel continuously retains pricing advantage v for its products in the market. In addition, substitution effect of products exists between channels, therefore we introduce here the channel demand transfer coefficient r (r > 0). The essence of channel transfer derives from the cognitive difference of consumers for paid price when purchasing products: the price paid by consumers in the direct sales channel is the sales price pd of its product, while the price paid by consumer to obtain a product in OEM channel is the sales price pd, together with the corresponding brand ue v.So the net price paid to obtain the product is — v. To sum up, we express the market demand Qd in the direct sales channel and the market demand Qd in OEM channel in hybrid channel respectively using the following demand functions: Qg = (a- bp5)+r[(p" -v)-pg] (3) Q% = [a-b(p%-v)]+r\p%-(p%-v)] (4) Advances in Production Engineering & Management 12(2) 2017 187 Zhu, Li, Wang Consumer Manufacturer (Stackelberg 2nd) (c) Branding business _k -► (Stackelberg 1st) (a) Consumer pH (a) Fig. 2 Channel structure - hybrid channel (disperse decision making) 2.2 Symbol description Major parameters are described in Table 1. Table 1 parameter description Symbol Symbol description Participant Price Demand Superscript/subscript M Manufacturer R Branding business Target w Wholesale price of manufacturer p Unit price of promoting products g Unit profit level of branding business c Unit production cost of manufacturer (private information of manufacturer) v Brand premium of branding business r Channel transfer coefficient b Price demand elasticity coefficient a Market demand of direct sales channel or OEM channel (assumed being equal) Q Channel demand R Branding business M Manufacturer D Single direct sales channel of manufacturer 0 Single OEM channel of manufacturer H Hybrid channel 1 Centralized decision making n Yield returns 3. Model building 3.1 Centralized supply chain model (I) Here, the total profit function of supply system is n's = (pd ~c)Qd + (Po ~c)Qo Optimization objective of the system: max n< = -c)<& + (p£ (5) 3.2 Disperse supply chain model (C) The profit function of branding business is n^ =gHQo and that of the manufacturer is nHM = (p5-c)Q5 + (w«-c)Q«. In the case of hybrid channel, the branding business specifies the product profit level ^according to its profit maximization goal max njl, and then the manufacturer specifies wholesale prices wHand according to decision-making goal max n^- The decision-making objective is expressed as below: 188 Advances in Production Engineering & Management 12(2) 2017 A study on the manufacturing decision-making and optimization of hybrid-channel supply chain for original equipment... maxnrf = gHQ% s. t. wH = arg max n$ pf = arg max inax< = (p£ -c)Q% + (wH -c)Q% H (6) (7) (8) (9) Its equilibrium solution is shown in Table 2. Table 2 performance comparison of the centralized decision making and decentralized decision making in hybrid channel Hybrid channel Centralized decision making I* Decentralized decision making H* A( I * - H *) a + bc a + bc Price Pd 2b p"' = ■ 2b v ' a- be- rv „. (a — bc)(2b + 3r) rv r(a-be+ bv + vr) Ü Sales volume Q' =--Q% = --—----— - —-;-r-- <0 « Vd 2 4(0 + r) 4 4(0 + r) „ „ ,' (a — bc)(a — rv — be) „ ia-bc)(2ab + 3ar-3bcr-r2v-2b2c-bvr) (a-bc)r(a - be + bv + vr Profit -~b- *H< =-8b(bT7)---8b(bT7)-<0 Wholesale price WH" = ab + bvr + b2v+ 3b c + 2bcr + 2ar 4b{b + r) .' a + bv + bc 3ab + + 3ä2p + ä2c+ 22>cr + 2ar a - bc + bv + vr Price n' =__p„ =---<0 Po 2b 4b(b + r) 4(b + r) .' a + bv — bc + rv „' a + öv + rv — bc a- bc + bv + vr Sales volume O' =--0H =---;-^->0 Vd 2 4 4(b + r) U TT q H' (ab + bvr + + 34^c + 24er + 2ar~)(a — bc + bv + pr) = 164(4+r) „' (a-bc+bv + vr) Profit nS = --- i + r) ^ = (a +bv — bc)(a + bv — bc + rv) u' _ h' . h' (q + to-ac + ^ta + to-fc "T ¡In 4b LMo Total profit f' (a+bv-bc)2 , =-—--I" 2b v{2 bc+rv-bv- 2a) lMd + K ' + < (a — bc + bv + vr)2 16 (b + r) >0 Advances in Production Engineering & Management 12(2) 2017 189 Zhu, Li, Wang 4. Decision-making mode analysis of hybrid channel 4.1 Precondition of existence for hybrid channel Considering from the prospective of manufacturers, existence of hybrid channel relies on simultaneous establishment of two channels, namely products per unit of manufacturer in both direct sales channel and OEM channel are of profitability (pf >c and wH > c) and realizability of its corresponding yield capacity (Q% >0 and Qjf >0). ^Direct sales channel: pf = ("-^)(2b+3r)_ r, rd 2b Yd 4(b+r) 4 , , ab+bvr+b2v+3b2c+2bcr+2ar a+bv+rv-bc „ OEM channel: wH =-Q" =->0; 4 b(b+r) 4 The following can be obtained: 0 < c < ^ and 0 < v<( ^ + (a — bc~). 4.2 Lessons leant from the optimization from decentralized decision making to centralized decision making Within the interval range (0 C -: L J 2b b (••• 0 < c <-, -V v>0 both lead to v > -, - this condition is a relaxed constraint. b b (2) Q>; • 0KqEM). However, with an elevated brand premium level, the centralized decision-making mode will cause more performance loss (that is the difference between the profit under centralized decision-making mode and that under decentralized decision-making mode), namely decreasing degree of Kl, is greater. A higher brand premium level means that status of branding business is more and more important, so on the whole, the profit hierarchy ratio K^EM of OEM channel under the centralized decision-making mode presents a decreasing tendency. 192 Advances in Production Engineering & Management 12(2) 2017 A study on the manufacturing decision-making and optimization of hybrid-channel supply chain for original equipment... Table 3 calculated example - Influence of brand premium of branding business on decision-making profit in hybrid channel a 10.000 r 2.000 v Lower limit Upper limit b 2.000 c 3.000 1.414 2.000 v 1.500 1.600 1.700 1.800 1.900 Total system profit 7.688 8.070 8.468 8.880 9.308 Total profit of manufacturer 4.563 4.690 4.823 4.960 5.103 Total profit of branding business 3.125 3.380 3.645 3.920 4.205 Hybrid channel (decentralized decision making) Profit of direct sales channel (manufacturer) Profit of OEM channel Profit hierarchy KqEM of OEM channel 1.750 5.938 0.900 1.700 6.370 0.885 1.650 6.818 0.870 1.600 7.280 0.857 1.550 7.758 0.845 Channel profit ratio of manufacturer 0.622 0.569 0.520 0.476 0.436 Total system profit 9.250 9.760 10.290 10.840 11.410 Total profit of manufacturer 5.303 5.483 5.671 5.865 6.065 Total profit of branding business 3.947 4.277 4.619 4.975 5.345 Hybrid channel (centralized decision making) Profit of direct sales channel (manufacturer) Total profit of OEM channel 0.500 8.750 0.400 9.360 0.300 9.990 0.200 10.640 0.100 11.310 Profit hierarchy K^EMof OEM channel 1.217 1.189 1.163 1.139 1.116 Channel profit ratio K^ of manufacturer 0.104 0.079 0.056 0.035 0.017 Optimized profit increment of supply system 1.563 1.690 1.823 1.960 2.103 5.2 Influence of manufacturer production cost on decision-making profit of hybrid channel We set a = 10, b = 2, r = 2 and v = 1.5, the value range of therequired production cost c when hybrid channel is built is (2.879,3.500). We take five data points within production cost range to conduct a simulated calculation. The simulation results are presented in Table 4. The following findings can be obtained from the results: • In hybrid-channel decentralized decision-making mode, with a significant improvement of production cost advantages (production cost becomes lower and lower), the profit income of manufacturer and branding business increase, as well as the total profit of the system. It can be seen from the details in the Table 2 that the profit increase of the manufacturer comes from both the direct sales channel and OEM channel, but in terms of the degree of increase, as can be seen through the increasing tendency of the channel profit ratio of the manufacturer, profit increase from the direct sales channel is more significant. Thus, the cost advantage is extremely beneficial to the two channels and the overall system, and it is more effective on the performance improvement of the manufacturer in the direct sales channel. In the meantime, cost advantage of a manufacturer is also a symbol of its status in OEM channel. A lower cost means a higher profit hierarchy ratio K^EM in OEM channel. With a prominent increase of cost advantages, the value of KqEM will become increasingly large. • In hybrid-channel centralized decision making, with increasingly prominent production cost advantages, the profit variation is largely similar to that in the decentralized decision-making mode, namely the profits of participating enterprises, the two channels and the whole supply system all increase. However, the degree of profit increase of the direct sales channel is slower than that of the decentralized decision-making mode ( K^ < ). Advances in Production Engineering & Management 12(2) 2017 193 Zhu, Li, Wang That's to say, the manufacturer gives up more profits of the direct sales channel in order to help achievethe optimization objectives of the centralized decision making in OEM channel. The manufacturer, therefore, can obtain more compensation from OEM channel as a return of its cooperation in the centralized decision-making process. The profit hierarchy ratio K^em in OEM channel will certainly increase (KqEM >KqEM) as the result. However, with the elevation of production cost advantages, performance improvement of the direct sales channel is always possible, so it's observed from overall tendency that the channel profit ratio Kj^ of the manufacturer is on a rise. The proportion of the profit income of the manufacturer in direct sales channel against its total profit increases. A lowering production cost means that the status of the manufacturer in OEM channel becomes more and more important, so the profit hierarchy ratio K^EM of OEM channel presents an increase tendency. Table 4 calculated example - Influence of manufacturer production cost c on decision-making profit in hybrid channel a 10.000 r 2.000 c Lower limit Upper limit b 2.000 v 1.500 2.879 3.500 c 3.400 3.300 3.200 3.100 3.000 Total profit 5.888 6.309 6.750 7.209 7.688 Manufacturer total profit 3.243 3.548 3.870 4.208 4.563 Branding business total profit Profit of direct sales channel (manufacturer) Total profit of OEM channel Profit hierarchy KgEMof OEM channel 2.645 2.761 2.880 3.001 3.125 Hybrid channel (decentralized decision making) 1.000 4.888 0.848 1.169 5.141 0.862 1.350 5.400 0.875 1.544 5.666 0.888 1.750 5.938 0.900 Channel profit ratio K^ of manufacturer (direct sales 0.446 0.491 0.536 0.579 0.622 channel/OEM channel) Total profit 7.210 7.690 8.190 8.710 9.250 Manufacturer total profit 3.849 4.187 4.542 4.914 5.303 Branding business total profit Profit of direct sales channel (manufacturer) Total profit of OEM channel 3.361 3.503 3.648 3.796 3.947 Hybrid channel (centralized decision making) 0.080 7.130 0.170 7.520 0.270 7.920 0.380 8.330 0.500 8.750 Profit hierarchy KgEMof OEM channel 1.122 1.147 1.171 1.194 1.217 Channel profit ratio K^ of manufacturer 0.021 0.042 0.063 0.084 0.104 Optimized profit increment of supply system 1.323 1.381 1.440 1.501 1.563 6. Conclusion This paper discussed the influence of different parameter intervals on channel model selection for manufacturer and branding business, solved the conditions for building a hybrid channel and unraveled the optimization mechanism of the hybrid-channel OEM supply chain. In addition, the paper discussed and verified the feasible optimization schemes for hybrid-channel OEM supply chain, including those for optimizing decision-making parameters and decision-making mode. This paper presented the following important findings: (1) it is possible to realize profit performance improvement of the two parties in a hybrid-channel OEM supply chain and the whole system by optimizing decision-making parameters; (2) In terms of the total profit level of the supply system, the centralized decision-making mode is superior to the decentralized decision- 194 Advances in Production Engineering & Management 12(2) 2017 A study on the manufacturing decision-making and optimization of hybrid-channel supply chain for original equipment... making mode. 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