The Benefits of Decentralized Decision-Making in Supply Chains

Abstract

The inefficiency of decentralized decision-making is one of the most influential findings of the supply chain coordination literature. This paper shows that with the possibility of continuing trade, decentralization can be beneficial in improving supply chain performance. In a supply chain with decentralized decision-making and continuing trade, it is easier to incentivize players to coordinate on efficient actions. There are more gains to be shared from coordination, and by virtue of each player being a smaller influence on the system, any individual player’s opportunism is less of a threat to coordination. These stronger incentives to coordinate manifest themselves in higher profits of supply chains with decentralized decision-making and additional terms of contracting acceptable to all players. Our analysis demonstrates that the widely accepted inefficiency of decentralized decision making is an artifact of the simplifying assumption of one-off trade, and identifies conditions for departures from this result with continuing trade. The newly identified phenomena provide a possible explanation for the paradoxically good performance of very decentralized supply chains seen in emerging market cooperatives, urban logistics, micro-retailing, and other settings.