Retailer’s multi-tier green procurement contract in the presence of suppliers’ reference point effect

Abstract

Large environmentally conscious retailers often incorporate resource allocation programs into long-term procurement contracts in order to improve suppliers’ green efforts. The retailer has two procurement strategic choices: allocating order quantity equally to all upstream suppliers, or unequally so. It must also consider how to ensure optimal use of resources. In our study, we build an analytical game model to analyze procurement strategies in a retailer-dominant green supply chain by considering suppliers’ psychological reference point in their different attitude towards allocated resource. We divide the suppliers into two types according to differences in their psychological reference point, and the degree of execution of the contract is left to the supplier’s discretion. We compare the results in deterministic and stochastic scenarios, while extending the dynamic scenario. We observe stronger green efforts in suppliers who actively cooperate when order quantity is equally allocated. However, on the contrary, these suppliers also generate less profit. Therefore, the resource allocation program is not effective in coordinating supplier’s green effort if order is allocated equally. Thus, the optimal procurement strategy is to combine the resource with unequally allocated order quantity.