A coordination theoretic model for three level supply chains using contracts

Abstract

Typically, supply chain members are dependent on each other to manage various resources and information. The conflicting objectives and lack of coordination between supply chain members may often cause uncertainties in supply and demand. The basic elements of coordination theory like interdependency, coherency and mutuality may help in effective flow of information and material between the dependent supply chain members. Supply chain contract can be an effective coordination mechanism to motivate all the members to be a part of the entire supply chain. There are different types of supply chain contracts such as buy back and quantity flexibility contracts. Supply chain performance may be substantially improved by properly designing the contracts to share risks and rewards. The objective of this paper is to explore the applicability of coordination elements through an analytical model in three-level (Manufacturer-distributor-retailer) serial supply chains using contracts. The model evaluates the impact of supply chain contracts on various performance measures. The impact of some contract may be on some specific performance measure only, which helps managers to choose the type of contract if there is an objective of improving certain performance measure before hand. In three-level supply chains, the contracts are designed at two distinct interfaces: Manufacturer-distributor and distributor-retailer. The model demonstrates the complexity in evaluating the decision variables of three level supply chains. The proposed model is a novel approach to apply coordination theory at various levels of supply chain. The model also presents how the coordination elements are related to each other in various coordination cases.