Revenue-sharing contracts in an N-stage supply chain with reliability considerations

Abstract

Revenue-sharing (RS) contracts have been used in a number of industries and have proven to be effective. However, the current RS contracts can be limited when improving the supply chain performance because of member reliability issues. This paper studies a revenue-sharing with reliability (RSR) contract in an N-stage supply chain. In this type of supply chain, there are more than two stages, and certain members have more than one upstream member. First, we propose an RSR contract that can coordinate supply chains and arbitrarily allocate total profits. A two-round profit allocation mechanism is utilized in this RSR contract. In the first round, an initial profit allocation scenario is decided; in the second round, the allocation is adjusted by considering the reliability of all of the members. A flexible method for adjusting the profits in the second round is proposed. Second, we study the incentives for the members to improve their reliability under the RS and RSR contracts by considering two realistic types of improvement investments in reliability. It is found that, in some cases, the RS contracts are limited in terms of encouraging the members to improve their reliability. Next, we show that there are greater incentives for members to improve their reliability under an RSR contract. We discuss in what cases the maximum possible profit of the supply chain under the RSR contract is higher than under the RS contract. Our analytical and numerical results yield insights into how managers can be encouraged to improve their reliability by setting certain decision variables.