Multi-resource emergency supply contracts with asymmetric information in the after-sales services

Abstract

In this paper, we investigate the contract design in a multi-resource service supply chain between a first line service provider and an emergency supplier under information asymmetry. The service provider is contractually responsible for the timely repair of the assets that fail, under a given service level agreement with the asset owner. To execute a repair, the service provider needs both engineers and spare parts to replace malfunctioning parts. In case of a spare parts stock out, the service provider can either wait for the regular replenishment of parts from the central depot or decide to hand over the entire call to an emergency supplier. For the latter case, a contract between the service provider and the supplier is necessary that specifies how the emergency supplier is compensated by the service provider. Particularly, we investigate what is the best contract the supplier can offer when information on asset reliability only resides with the service provider but remains hidden for the emergency supplier (information asymmetry). In the first type of contracts, the supplier charges the service provider a price, specified in a so-called price-only contract, for each time he takes over a call. As an alternative, we study the so-called revenue-sharing contracts in which the supplier receives a fraction of the service provider’s annual revenue and in return agrees to charge a lower price per call. In addition to the standard (single) revenue-sharing contract, we study the implementation of a menu of revenue-sharing contracts. We show that finding a menu of revenue-sharing contracts is not always possible and, if possible, does not necessarily give a higher profit to the supplier than a single revenue-sharing contract. In an extensive numerical experiment, we show that the combination of the single and the menu of revenue-sharing contracts results in, on average, less than 5% loss of the supplier profit under perfect (symmetric) information. Additionally, we find that, while having private information on the assets’ failure rates increases the service provider profit, the increase is insignificant, resulting in an additional profit of only 0.06% on average. Finally, we observe that the supplier can increase his profit, on average, up to 14% if he incites the LSP by means of a side-payment mechanism to share his private information.