Designing supply contracts in supplier vs buyer-driven channels: The impact of leadership, contract flexibility and information asymmetry

Abstract

In the context of supply contract design, the more powerful party usually has the ability to assume the leadership position. Traditionally, the supplier (e.g., manufacturer) has been more powerful, and, hence, the existing literature in the area emphasizes supplier-driven contracts. However, in some current markets, such as the B2B grocery channel, the power has shifted to the buyer (e.g., retailer). In keeping with these trends, this paper considers a buyer-driven channel and two specific cases are analyzed where the buyer has: (i) full information; and (ii) incomplete information about the supplier's cost structure under three general contract types. The buyer's optimal contracts and profits for all of the corresponding six scenarios are derived. A comparison of the presented results with previous work on supplier-driven channels allows an analysis of the individual and joint impacts of leadership structure, contract flexibility and information asymmetry on supply chain performance. It is shown that, from the system's perspective, the buyer-driven channel is more efficient than the supplier-driven channel under an optimal one-part linear contract. The common wisdom is confirmed that assuming the leadership position is beneficial for the leader in both supplier and buyer-driven channels and the value of the leadership in either channel is greater under more general contract types under full information. Further, under conditions of information asymmetry, it is demonstrated that the leadership is not necessarily beneficial for either party, and, hence, the common wisdom is not valid. Interestingly, it is found that sometimes one party can forfeit the leadership and still achieve a higher profit. [Supplementary materials are available for this article. Go to the publisher's online edition of IIE Transactions for the following free supplemental resource: Appendix]