Multi-echelon supply chain coordination: Contract sequence and cut-off policies

Abstract

The influence of contract sequence and interaction between different contract mechanisms on profit allocation among supply chain agents and cutoff policies of a multi-echelon supply chain have received scarce consideration in the literature. In this study, we try to fill this gap and examine a serial decentralized three-echelon supply chain using a dynamic game of incomplete information where the supplier and the manufacturer can choose either a short-term contract or a long-term contract. Using two sequential bilateral monopoly settings we analyze four scenarios of contract sequence for calculating the payoffs of supply chain agents. Based on these payoffs, we calculate the Bayesian Nash equilibrium of the game. This study shows the importance of contract sequence in profit allocation among different stakeholders of a decentralized multi-echelon supply chain. We further demonstrate that the upstream agent does not necessarily hold higher bargaining power among all the agents. Our key findings are as follows: first, optimal profit levels, as well as cutoff policies, are influenced by marginal costs and reservation profits of supply chain agents along with contract sequence; second, supply chain coordination is dependent on contract sequence; third, supply chain agents do not naturally choose channel coordinating contract sequence; fourth, the supplier needs to devise incentive scheme for the manufacturer to coordinate the overall supply chain; fifth a myopic supplier prefers short-term agreement and a foresighted supplier prefers long-term agreement.