Journal of Integrative Agriculture Advanced Online Publication: 2013

Doi: 10.1016/S2095-3119(13)60585-7

Revenue Sharing in Dairy Industry Supply Chain --- A Case Study of Hohhot, China1
QIAN Gui-xia1, 2, ZHANG Yi-pin1, WU Jian-guo2, 3 and PAN Yue-hong4
1 2 3 4

School of Economics & Management, Inner Mongolia University, Hohhot, 100021, P.R. China Sino-US Center for Conservation, Energy and Sustainability Science in Inner Mongolia, Hohhot, 010021, P.R. China School of Life Science & Global Institute of Sustainability, Arizona State University, Tempe, AZ, 85287, USA Agricultural Information Institute of Chinese Academy of Agricultural Sciences, Beijing, 100081, P.R. China

Abstract
Dairy industry has become an increasingly important enterprise in China as people’s dietary preferences and composition have changed dramatically with rapid economic development in the past several decades. A number of problems, however, exist in China’s relatively young dairy industry, including the imbalanced allocation of profits throughout the dairy supply chain. One of the root causes of the melamine infant powered milk scandal in 2008 was the unfair profit allocation mechanism in dairy supply chain. The revenue sharing contract approach has proven to be effective in generating market shares and total profits. In this study, we apply the three-stage revenue sharing contract model of Giannoccaro and Pontrandolfo (2004) in an analysis of dairy supply chain to explore its problems in profit allocation and possible solutions to them. The analysis was conducted by a case study of Hohhot, often called as “Milk capital of China”. Our results show that the current profit distribution in the dairy supply chain is not balanced: the supermarket’s profit > farmer’s profit > manufacturer’s profit. Under the revenue sharing contract setting, the dairy industry’s total profit increased by 12.49%. By exploring different parameters in the revenue sharing contract model, we have found that a win-win situation can be created among all the members of the supply chain. In dairy supply chain, the ratio of the revenue reserved for the supermarket itself is equal or greater than 47% and the ratio of the revenue reserved for the manufacturer itself is between 46.4% and 50.2%. The values of the parameters that generate a sustainable or win-win situation are related to the bargaining position in the dairy supply chain. The revenue sharing contract has proven to be effective and desirable by all the dairy chain partners in dairy supply chain. The results of this study provide relevant information for improving the dairy supply chain structure and the revenue sharing contract model can be applied to other industries, sectors, and regions.

Key words: Hohhot, dairy industry, revenue sharing contract, win-win INTRODUCTION

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QIAN Gui-xia, Tel: +86-471-4992524, Fax: +86-471-4993520, E-mail: gx.qian@imu.edu.cn; Correspondence PAN Yue-hong, Tel:

+86-10-82109913, E-mail: panyuehong@caas.cn 1

A supply chain (SC) contains two or more entities (i.e., suppliers, manufacturers, distributors and retailers) linked by a flow of goods, information, and funds, which is centralized or decentralized. The former means that there is a unique decision maker in the SC, the latter denotes that several independent actors make decision at the different SC stages, in which each intends to optimize its costs or benefits. This causes the low efficiency or inefficiency of the supply chain. In order to improve the performance of the supply chain as a whole, supply chain management (SCM) was introduced in the late 1990s. Balsmeier and Voisin (1996) defined SCM as “a strategy that integrates the various organizations’ objectives in order to increase the efficiency of the entire supply chain”. According to Copacino (1996) “the great benefit of SCM is that when all of the channel members-including suppliers, manufacturers, distributors and customers behave as if they are part of the same company, they can enhance performance significantly across the board”. SCM research work involves all activities and processes including planning, coordination, operation, control and optimization of the whole supply chain system (Tsay et al. 1999). Among them, contract is an important study area. SCM contract research cover a wide range of issues. Tsay et al. (1999) grouped them into eight categories. At that time, prescribing how the benefits from coordination ought to be divided among the parties (revenue sharing contract) was not found in the SCM contract literature. Revenue sharing (RS) contract is a supply chain contract in which the manufacturer charges low wholesale price to the retailer and shares a fraction of revenue generated by the retailer. Even if no returns are allowed, everyone in the supply chain will be better off with this type of arrangement. As possible mechanisms for achieving coordination in SC, revenue sharing contracts have been studied extensively since 1998. Cachon and Lariviere (2000) presented the RS contract concept and studied the impact on SC performance. The revenue sharing contract can be described by two parameters, retail price and retailers’ revenue retention ratio. Giannoccaro and Pontrandolfo (2004) presented a revenue-sharing model proposed by Cachon and Lariviere (2000) that aims at coordinating a three-stage supply chain. The model increases the system efficiency as well as the profits of all the chain members by fine tuning the contract parameters. Chang and Hsueh (2006) extended Giannoccaro and Pontrandolfo (2004) to explore a three-tier supply chain integration problem with the time-varying multi-period demand and the constant price elasticity demand function. Besides, revenue sharing contracts are also widely adopted in a variety of industries. Shapiro (1998), Dana and Spier (2001), Gerchak et al. (2001), Veen and Venugopal (2005) and Mortimer (2008) study the revenue sharing contracts adopted in video rental industry supply chain and its impact. Revenue sharing contracts have been proven to be effective in generating market shares and total profits. Warren and Peers (2003) reported that Blockbuster's market share of video rentals increased from 24% in 1997 to 40% in 2002 after a revenue sharing contract was adopted. Mortimer (2008) estimated that the adoption of revenue-sharing contracts increased the video-rental industry's total profit by 7%. Besides, revenue sharing contract has also been adopted in other industries, including the retailing with consignment contracting (Turcsik, 2002), the internet content services (Foros et al. 2009), the mobile networks with independent content providers and mobile service supply chain (Foros et al. 2009; Lu et al. 2010), the assembly systems with vendor-managed inventory (Gerchak and Wang, 2004), semiconductor industry supply chain (Bahinipati et al. 2008), and airline alliances (Hu et al. 2010). Less research has been done, however, on revenue sharing in the dairy supply chain. Dairy industry is increasingly important in China. Milk consumption traditionally has not been a part of the Chinese diet, but has gradually become a major source of protein in China in recent decades (Fuller et al. 2004). Improved by consumers’ demand and local government’s support, China’s dairy industry has thrived and ranked
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third in the world after the United States and India in 2007 in raw milk production (Qian et al. 2011). An entire supply chain has formed in China’s dairy industry, which consists of four actors: farmer, milk collection station, manufacturer and retailer. In the dairy SC, loose coordination exists between farmers and manufacturers, between manufacturers and retailers, respectively. Dairy enterprises hold dominant position in the dairy SC and the retailers control the sale channels. The dairy farmers invest much more money and are prone to higher risk but make less profit. The cost and profits of the four actors in the dairy supply chain are imbalanced (Qian et al. 2011). To solve the distorted profit distribution, the revenue sharing contract based on the three-stage revenue sharing model of Giannoccaro and Pontrandolfo (2004) is introduced to the dairy supply chain in this paper. In China, the variety of dairy products is limited. Almost 80% of raw milk is used for processing fluid milk and milk powder (Qian et al. 2011). Among them, the sales of fluid milk account for more than 65% of the entire dairy industry. For this reason, we take fluid milk as example to study the profit allocation of the dairy supply chain. In this paper, we first present a revenue sharing contract model adopted in dairy supply chain with three entities. Most of the research articles illustrate their results by using numerical examples. We did a case study of dairy supply chain by using the survey data of fluid milk in Hohhot, Inner Mongolia Autonomous region, one of the major dairy provinces in China. Then, we determine the reasonable parameters in the RS contract in order to coordinate the three-stage dairy supply chain, which can attain the win-win goal among all members. Finally, we present the main conclusions of our study and discuss the potential of the revenue sharing contract model.

THE REVENUE SHARING CONTRACT MODEL
In China’s dairy supply chain, there are four actors as above-mentioned. The infant powered milk scandal in 2008 urged the related governmental divisions to take the fresh milk collecting stations under their monitoring and control. The milk collection stations can be run only by three actors: farmers’ cooperatives, enterprises and dairy plots. But the milk collection stations only play a role to buy the raw milk from dairy farmers for the dairy enterprises. So we integrate the milk stations into the dairy enterprises in this paper. The dairy supply chain consists of three actors: farmer, manufacturer and retailer. The basic model setting introduced in this paper is similar to the one described in Giannoccaro and Pontrandolfo (2004). Consider a dairy SC made up of three stages: stage 1 is the supermarket (S), stage 2 the manufacturer (M), and stage 3 the farmer (F), as depicted in Fig. 1. In the dairy SC, the farmer (F) raises milk cows for producing raw milk. The manufacturer (M) buys raw milk from the farmer (F) and does some processing. The supermarket (S) gets processed fluid milk from the manufacturer (M) and sells them in the supermarket. The three actors are characterized by their marginal unit costs, c1 for selling 500 g processed milk; c2 for processing 500 g raw milk; c3 producing 500 g raw milk, respectively. A and B are the interface between stages 1 and 2, and 2 and 3, respectively.

wB , y
Farmers F） （ Manufacturer （M） c 2

wA, x
Supermarket （S） c1

d p c3 qB

qA
Fig. 1 The three-stage revenue sharing model
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In a market-like setting (m), the market demand is d and the unit price is p. The supermarket (S) orders the q quantity A , which is supplied by the manufacturer (M) at the unit price w A . In turn, manufacturer (M) orders the q quantity B at the unit price w B , which is supplied by the farmer (F) at the unit price w B . In the following, we will denote as

 Am and Bm the unit prices at the interfaces A and B in the m setting, given that they could

well differ from those adopted if a revenue sharing model was used. In particular, it is reasonable that Am  Bm  c2 and B  c3 . M and this would be balanced by a lower price w A : Similarly, M would keep a quota y of her revenue, giving the rest (1 - y ) to F and this would be balanced by a lower price w B .Finally, under a hierarchy-like setting (h), a unique decision maker would determine the most suitable quantity q that should flow through the chain, so as to cope with the given market demand. In dairy supply chain, every actor makes decision so as to maximize his profit. This occurs when the marginal revenue equals the marginal cost. M determines the raw milk order quantity qB to maximize his profit  m and S determines the processed milk order quantity q A to maximize his s . profit The goal of the analysis is to design the RS mechanisms to achieve channel coordination (maximum profit for the whole supply chain). A second objective is to analyze whether and how the contract parameters can be modified so as to more evenly share the profit along the chain (win–win condition for the chain partners), while guaranteeing channel coordination. Below, we calculate the profits in the different coordination settings ( P h stands for the total profit under the q q hierarchy-like (h) setting). The profit functions are computed considering that the quantities B and A are both equal to q; which is straightforward only under the hierarchy-like setting. In the market-like setting, once the q q q supermarket has set A ; the manufacturer will set B = A as well, given that she will have convenience to fully satisfy demand to maximize her profit. In the revenue sharing setting, the contract has to be designed so as to assure channel coordination (which implies both M and F willing to order the quantity q; as a result, it follows qB = q A : Market-like setting: Should a revenue sharing model be applied, S would keep a quota

x

of his revenue, giving the rest (1 - x ) to

 Sm  p min(q, d )  (Am  c1 )q  Mm  Am q  (Bm  c2 )q  Fm  Bm q  c3q
Revenue sharing setting:

（1） （2） （3） （4） （5） （6） （7）

 Sr  xp min(q, d )  (A  c1 )q  Mr  y[(1  x) p min(q, d )  Aq]  (B  c2 )q  Fr  (1  y)[(1-x) p min(q, d )  Aq]  B q  c3q
Hierarchy-like setting:

 h  p min(q, d )  (c1  c2  c3 )q

Let us now compute the quantity q that a given decision maker would like to have flowing throughout the chain, so as to maximize his profit given by one of (1)–(7). We perform the analysis just for those actors in the chain who can actually set q (at least at one of the interfaces A or B). Given that all the attendant profits are probabilistic (they depend on the uncertain demand d), the newsvendor model is utilized to derive the optimal quantity, i.e. the
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quantity that maximizes the profits. Let F be the cumulated probability of demand d; i.e. F is the probability that demand is not higher than d. The optimal quantities of S S(q) are given by (8):

S(q) = q(1- F(q)) + ò yf ( y)dy = q - ò F( y)dy q q 0 0

（8）

In the market-like setting (m), S maximizes his expected profits, i.e.,  'Sm  0 . By using (8) into (1), the optimal quantities of S F(qSm ) can be given in (9):

F(qSm ) =

p - (w Am + c1 ) p

（9）

In revenue sharing setting, S, M and the whole dairy SC maximize their profits, i.e., 'Sr  0， 'Mr  0 and
 'h  0 . It follows:

F (qSr ) 

xp  ( A  c1 ) xp

（10）

F (qMr ) 

y(1  x) p  (B  c2   A ) y(1  x) p

（11）

F (qh ) 

p  (c1  c2  c3 ) p

（12）

Hence, with respect to effectiveness, the contracts have to be designed such that qSr =qMr =qh or, equivalently, F (qSr )=F (qMr )=F (qh ) . In fact, this implies that both the profits of S and M and the profit of the entire SC be maximized: in fact, the optimal quantity for the S and M coincides with that for the whole SC. This results in two independent equations, so yielding:

A  (c1  c2  c3 ) x  c1

（13） （14）

B  (c1  c2  c3 )( x  y)(1  x)  (c1  c2 )

Therefore, if the adopted RS model conforms to (4.13) and (4.14) then channel coordination is guaranteed regardless of the adopted values of

x

and y ; which must belong to the interval (0,1), x [0,1], y [0,1] . In

particular, as both  A and  B must be positive, from (4.13) and (4.14) it follows: x c1 c1  c2  c3

（15）

y

c1  c2 x (1  x)(c1  c2  c3 )

（16）

The values of

x

and y that satisfy the win–win condition then be established so as to pursue the objective:

the desirability supply chain partners. We can measure such desirability by the expected value of the ratio: the higher the ratio (provided that it is not lower than 1), the more the actor is content with the adopted contract, i.e.  Rs  1,  Ms  1,  Fs  1 . By properly using the profits as given by (1)–(6), it follows:
 Rm  Mm  Fm

x

pE[min(qSm , d )]  ( Am  c1 )qSm  ( A  c1 )qh pE[min(qh , d )]
5

（17）

y

 Am qSm  (Bm  c2 )qSm  (B  c2 )qh p(1   A ) E[min(qh , d )]   Aqh

（18）

y  1

Bm qSm  c3qSm  (B  c3 )qh p(1   A ) E[min(qh , d )]   Aqh

（19）

w A and w B being given by (13) and (14).

CASE STUDY OF HOHHOT, INNER MONGOLIA The research area and data
Hohhot, which also means the green city, is the capital of North China’s Inner Mongolia autonomous region. The city lies between the Yinshan Mountain and the Yellow River and is 400 km from Beijing. It is the political, economic and cultural center of Inner Mongolia. The most important industry in Hohhot is the dairy industry. Hohhot is also called the “milk capital” because it boasts two of the country’s largest dairy enterprises, Mengniu and Yili. Four indicators including milk cow population, milk production, per capita share of fresh milk and the sales income of dairy products processing enterprises are in the first place among the large and medium cities in China (Hohhot government website, 2013). In order to get the related data, we did the survey in Hohhot in August and October of 2011, respectively. We selected 10 farmers and 6 supermarkets through random sampling method using a face to face questionnaire. There are 2 milk collection stations providing milking service for these farmers. Mengniu and Yili, two largest dairy enterprises in China, build their base in Hohhot. So we did survey on them. For all the objects, we investigated their cost and profits. It is difficult for us to get these information from the dairy enterprises. So we only choose two enterprises to do the survey. Even though the number of the dairy enterprises is less, these two dairy enterprises are also representative because their sales income accounts for more than 50% of the total in China.

Cost and profit of dairy supply chain
According to the survey data, the cost and profit data are depicted in Fig. 2. From this fig., we can find that three actors can make profits in dairy supply chain. Farmers get the profit of 0.1 yuan per 500 g raw milk, enterprises get 0.084 yuan processing per 500 g fluid milk and supermarket can get 0.26 yuan selling per 500 g processed fluid milk. That demonstrates that the profit for supermarkets is the highest, next is farmers and enterprises get lowest profit for processing unit fluid milk.

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TC：1.31 yuan TR：1.41 yuan Profit：0.1yuan

TC：2.966 yuan TR：3.05 yuan Profit：0.084 yuan

TC：0.11 yuan TR：0.37 yuan Profit：0.26yuan

Farmer (F)

Manufacturer (M)

Supermarket (S)

Fig. 2 Each actor’s cost-benefit in dairy supply chain

The profit margin for supermarket is 236.3%, much higher than that of farmer, 6.24% and that of enterprise, 2.83%. The result coincided with the findings of Qian et al. (2011). It demonstrates that the profit distribution is not balanced in the whole dairy supply chain, which has negative influence on the sustainable development of dairy industry. In order to coordinate the dairy supply chain, we used the revenue sharing contract model derived in the previous section. From the survey data, we can get the marginal cost, price, and market demand, which is shown in Table 1.
Table 1 Each actor’s marginal cost and market demand Variables Unit: yuan/500g Value 0.11 1.18 1.31 2.68 1.41 3.05 Normal distribution（393627，38485）

c1 c2 c3

 Am Bm p D

From equation (9) and (12), we can calculate the optimal-order quantities which S buy from M. In the market-like setting, the order quantity for S to buy from M is 170451.5 kg per day. While in the revenue sharing setting, the optimal-order quantities amount to 176609 kg per day. Obviously, the order quantity under the revenue sharing settings is much higher than that under the market-like settings. Based on the different order quantity under different setting, we can get the associated expected profits, which are reported in Table 2. Under the market-like settings, the expected profit for S is 74541 yuan/day, for M is 30681 yuan/day and for F is 34090 yuan/day. The profit for the whole dairy SC is 139312 yuan/day. Under the revenue sharing setting, the profit for the whole dairy SC is 156719 yuan/day, which is 17407 yuan/day higher than that under the market-like settings. The dairy SC efficiency is increased by [ E ( h )  E ( m )] / E( m )=12.49% .
Table 2 The expected profits under market-like setting and revenue sharing setting Unit: yuan/day

E ( Sm )
74541

E ( Mm )
30681

E ( Fm )
34090
7

E ( m )
139312

E ( h )
156719

Maximum profit for the whole dairy supply chain
Maximum profit for the whole supply chain (channel coordination) can be achieved through the RS contracts as described in Section 2. The manufacturer will offer the contract ( w A ; x ) to the supermarket and the farmer will offer the contract ( w B ; y ) to the manufacturer, choosing among the available options as depicted in Figs. 3 and 4, respectively. Fig. 3 follows from equations (13). Under the revenue sharing setting, the wholesale price w A of S’s processed milk has linear relationship with his retained earnings proportion x . The w A and

x

values along the

continuous line can be selected by the manufacturer at the A interface. From Fig.3, we can find that w A and

x

were positive relations, namely the more the supermarket retains the revenue to itself, the higher the price of the processed milk is. Obviously, under the revenue sharing setting, manufacturer’s revenue is made up of two parts: sales income from selling the processed milk to the supermarket and revenue sharing from the supermarket. The less the supermarket returns the income share to the manufacturer is, at the higher price the manufacturer sells the processed milk to the supermarket is in order to make up the loss from revenue sharing from the supermarket. When the supermarket will keep all sales income itself, the revenue sharing setting doesn’t exist and the profit distribution returns to the situation of market-like setting.

Fig. 3 The wholesale price of processed milk and ratio of the revenue reserved by the supermarket

Once the feasible values for

x

are determined, equation (14) can be put into relation and graphically

represented in a y Cartesian plan, with

x

varying in its domain (Fig. 4). Under the revenue sharing setting, the

w B and y have linear relationship. But it is different with Fig. 3. The ratio of the revenue sharing from the manufacturer to the farmer depends on the ratio of revenue sharing from the supermarket. The supermarket is in the downstream of the dairy supply chain, directly facing the market fluid milk demand. So, only after the supermarket determines the proportion of revenue sharing, the manufacturer can decides the raw milk purchase price and revenue sharing proportion to the farmer in order to maximize its profit. Assuming that the supermarket keeps 20%, 30%, 50%, 60%, 70% of its income, the correspondent line between w B and y is shown in Fig. 4.

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Fig. 4 The raw milk purchase price and the ratio of the revenue reserved by the manufacturer

Regardless of the ratio of sales revenue the supermarket keeps for itself, the raw milk purchase price for the manufacturer paying for the farmer has the positive relation with the ratio of revenue the manufacturer keeps for itself. Obviously, if the manufacturer keeps the more revenue itself, the farmer’s revenue will decrease. The farmer will not be willing to accept the lower raw milk purchase price. Even though they accept the lower price in a period of time, they will give up feeding milk cows and transfer to other industries with the profits falling down. With the increase of the value x , the line in the first quadrant constantly moves downwards. It shows that the more the ratio of the revenue the supermarket keeps for itself, the less the manufacturer controls the profit space is. For example, when the supermarket keeps 20% of the revenue for itself, the manufacturer may choose the retained revenue proportion in the interval [42.0%, 1], the raw milk purchase price will fluctuate in the range of [0,1.21] yuan. While the supermarket keeps 70% of the revenue, the manufacturer may choose the retained revenue proportion in the narrow interval [95.4%, 1], the raw milk price fluctuation narrows to [0, 0.036]. We can conclude that the supermarket’s decision on profit distribution have great influence on that of the manufacturer and farmer.

Win–win condition for the dairy chain partners
From the above analysis results, we can see that the RS model is effective to assure dairy channel coordination. But whether can the revenue sharing contract adopted in dairy supply chain be desirable by all the dairy supply chain partners (win–win condition)? In order to ensure that the farmer, manufacturer and supermarket are desirable for adopting the revenue sharing contract, the RS contract must guarantee that each in dairy supply chain can obtain more profits than in the market-like setting. The desirability issue can be considered through equations (17)-(19) and the results are reported as:

ì ï x ³ 0.47 ï ï -918367x 2 + 761649x + 83774 íy £ 117864 + 761649x ï ï -918367x 2 + 918367x - 8173 y³ ï î 117864 + 761649x
The three associated equations have been represented in a feasible domains for both

x- y

Cartesian plan, taking into account the

x

and y (Fig. 5). It can be easily determined that the area wherein the values of
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x

and y satisfy the desirability issue, namely let every actor in the chain gain more than in the m setting. The dashed background identifies such a win–win area, so suggesting a contract design that not only assures channel coordination, but also results well accepted by each actor in the dairy chain. The dashed background is circled by three curves. The vertical line (i.e.,

x = 0.47) is the left margin of the

dashed background, which means that 47% of the sales revenue is retained by the supermarket and 53% is given back to the manufacturer. Based on this contract, the manufacturer will sell the processed milk to the supermarket at the price of 1.112 yuan per 500 g, much lower than the price of 2.68 yuan under the market-like setting. Under this revenue sharing setting, the whole dairy chain’s revenue increased by 17407 yuan/day, which will be distributed in the manufacturer and the farmer. The supermarket gets the same profit as that under the market-like setting, 74541 yuan/day.

Fig. 5 The win-win area under the revenue sharing setting

Fig. 6 shows the expected profits gained by every SC actor for different choices of the contract parameters, which are compared to those obtained under the market-like setting. The supermarket, manufacturer or farmer gains more profit under the revenue sharing setting than that under the market-like setting. Four different contract settings are considered. The first is characterized by the values ( x , y ) = (48.2%, 47.8%). The profit for the farmer, the supermarket and the manufacturer is 39801 yuan/day, 75538 yuan/day and 41380 yuan/day, respectively. The distribution of the profit is even between the manufacture and the farmer. The supermarket gets more profit than that under the other three settings. The second results from ( x , y ) = (47%, 50.2%). The profit for the farmer, the supermarket and the manufacturer is 48088 yuan/day, 74541 yuan/day, and 34090 yuan/day, respectively, which is advantageous to the farmer. The third setting is given by ( x , y ) = (48%, 49%). The profit for the farmer, the supermarket and the manufacturer is 34972 yuan/day, 75225 yuan/day and 46522 yuan/day and, respectively, which is advantageous to the manufacturer. The fourth setting is ( x , y ) = (47.8%, 48.5%). The profit for the farmer, the supermarket and the manufacturer is 38364 yuan/day, 43444 yuan/day and 74911 yuan/day, respectively. The four contract settings can guarantee any actor in dairy chain to obtain a profit higher than in the market-like setting (win–win condition). The contract design (choice of the actual contract parameters) will depend on the relative contractual power of the dairy SC actors.

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Fig. 6 Expected profits for different choices of the parameters values of the contracts

DISCUSSION
Revenue sharing contract is a useful tool to coordinate the supply chain and is effective in a wide range of supply chains (Cachon and Lariviere, 2005). But it has limitations, and cannot be used in every industry. According to Cachon and Lariviere (2005), revenue sharing contact has three limitations: each retailer’s revenue depending on its quantity, price, and the actions of the other retailers, administrative burden, and retailer effort influencing demand. In order to verify the hypothesis that the revenue sharing contract can solve the profit allocation problem in dairy supply chain, we modify the three-stage revenue sharing contract model proposed by Giannoccaro and Pontrandolfo (2004) according to the case study of Hohhot. The results show that the three limitations can be ameliorated in dairy industry. Then we use the modified revenue sharing contract model to analyze the profit allocation of dairy supply chain. Under the revenue sharing setting, the dairy industry’s total profit increased by 12.49%, which proves that the revenue sharing contract is effective in dairy chain, i.e, the profit of the total supply chain is increased. But if only the total supply chain’s profit increases and the chain partners can not evenly share the profit along the chain (win–win condition for the chain partners), it is difficult to guarantee the supply chain coordination. To verify that it can be suitable for evenly sharing the profit along the chain, the reasonable parameters (the ratio of the revenue retained and distributed) are determined. In dairy supply chain, the ratio of the revenue retained for the supermarket itself is equal or greater than 47% and the ratio of the revenue retained for the manufacturer itself is between 46.4% and 50.2%. The sizes of parameters in a reasonable range closely relate to the bargaining position in the dairy supply chain. After the parameters are determined, we can find the win-win area for all members in the dairy supply. If the profits are allocated in this area, every actor in the chain on average gains more than in the market-like setting. It is reasonable if the profit allocation is in this interval. So, how to allocate the profits in three actors in dairy supply chain depends on their negotiation power. The actor who has the initiative and discourse power will gain more. These results show that the revenue sharing contract is desirable by all the partners in the dairy supply chain. In sum, the revenue sharing contract model is suitable for solving the imbalanced profit allocation in the dairy supply chain. However, there are two limitations in our study. First, we have studied the profit allocation of fluid milk while other varieties of dairy products such as milk power, cheese are not included in this research. Their production and consumption are growing with the increasing income. In our follow-up study, we will analyze the
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profit allocation of other dairy products in Hohhot and the entire China. Second, we did only one case study in Hohhot. It will be more valuable if an empirical analysis can be done based on the data of China’s dairy industry. Despite these limitations, our study has made an important progress in revenue sharing research on dairy industry over the previous research because most of the previous research has been based on contrived examples. Also, the methodology presented in this paper is of a sufficient versatility to be applied to other industries, sectors, and regions. Our results provide valuable information for improving the dairy supply chain structure and enhancing the sustainability of the dairy industry.

Acknowledgements
We thank Prof. Yong Jiang, Xiaochuan Guo and Xiaomin for reviewing an earlier version of this paper. We also thank two anonymous reviewers for their valuable comments and suggestions. This research was supported by two grants from the National Natural Science Foundation of China (70963007, 71163026).

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