Optimal Selection of Contracts for Supply Chain Coordination Under Decision Hierarchy

Abstract

In a decentralized supply chain with one supplier and one retailer, a properly designed contract can lead to supply chain coordination. In this chapter, we model the selection of an appropriate coordinating contract from a menu of contracts including wholesale price, buyback, and markdown money, while allowing both the supplier and the retailer to assume the roles of Stackelberg leader and/or supply chain captain. This work extends previous literature that assumes that the supplier is both the Stackelberg leader and the supply chain captain. In our models, either agent can make stocking and pricing decisions. Our findings suggest that the feasibility of a coordinating contract depends on the addition of Pareto-improving, profit-sharing conditions that motivate agents to take part in the contract. Further, the selection of an optimal contract is based not only on which agent holds the overstock liquidation advantage, but also on the decision structure of the supply chain. For instance, when the supplier is the Stackelberg leader and the retailer is the supply chain captain, as well as holds the inventory liquidation advantage, and controls the stocking level, then a wholesale price contract can coordinate the supply chain under the proposed Pareto-improving profit sharing, termed Pareto-improving coordination. Additional results and managerial implications are presented in the chapter.

Citation

Edirisinghe, C., Bichescu, B. and Shi, X. (2012), "Optimal Selection of Contracts for Supply Chain Coordination Under Decision Hierarchy", Lawrence, K.D. and Kleinman, G. (Ed.) Applications of Management Science (Applications of Management Science, Vol. 15), Emerald Group Publishing Limited, Leeds, pp. 151-180. https://doi.org/10.1108/S0276-8976(2012)0000015011