Two-tier Supply Chain Research Articles

An Experimental Investigation of Managing Quality Through Monetary and Relational Incentives

We investigate the efficacy of monetary and relational incentives for managing the quality of a product in a two-tier supply chain. In our setting, a retailer offers a supplier contract terms for a product, where the product can be low or high quality. The supplier can choose to exert high effort, which is costly but guarantees high quality, or low effort, which does not assure high quality with certainty. We compare how monetary incentives, such as a bonus that is paid to the supplier when high quality is received by the retailer, and relational incentives, such as the two parties engaging in a long-term relationship where there is the threat of punishment, affect overall quality and supply chain efficiency. Two of our primary results suggest that (1) relational incentives improve both quality and supply chain efficiency, regardless of whether a monetary incentive is present, and (2) when relational incentives are present, the impact of adding monetary incentives is nonmonotonic: less efficient monetary incentives appear to crowd out the benefits of relational incentives leading even to a reduction in supply chain efficiency, whereas more efficient monetary incentives actually complement relational incentives and lead to significant increases in both quality and supply chain efficiency. We then proceed by demonstrating that a behavioral model of fairness can organize the data quite well. Data are available at https://doi.org/10.1287/mnsc.2016.2716 . This paper was accepted by Serguei Netessine, operations management.

Trust-Embedded Information Sharing among One Agent and Two Retailers in an Order Recommendation System

Trust potentially affects the decision-makers’ behaviors and has a great influence on supply chain performances. We study the information sharing process considering trust in a two-tier supply chain with one upstream agent and two retailers, where the agent recommends ordered quantities (ROQ) to retailers and the retailer decides her/his ordered quantities according to the agent’s recommendation and self-collected information. There exist three types of information sharing patterns among the agent and two retailers, i.e., both retailers share their demand prediction (Pattern 1), one retailer shares her/his demand prediction (Pattern 2) and none of the retailers share their demand prediction (Pattern 3). Thus, we build corresponding mathematical models and analyze each party’s decision strategies in each pattern, respectively. The findings in this study show that sharing information can generally promote trust among enterprises in the entire supply chain and increase their profits in return. It is found that when the accuracies of the two retailers’ predicted demand differs, their behaviors of information sharing or not sharing significantly affect their expected profits. In Pattern 1 and Pattern 3, we find that retailers’ expected profits are negatively influenced by the agent’s accuracies of demand prediction. However, the retailer’s expected profits are positively linked to the agent’s accuracies of demand in Pattern 2. Consequently, we propose a series of strategies for retailers in different decision patterns after several simulation runs. In addition, we also find that the retailer whose prediction is less accurate can also gain more profits by un-sharing his/her demand prediction when the agent’s predict accuracy is between the two retailers.

A joint economic lot size model for a supplier-manufacturer-retailers supply chain of an agricultural product

Smooth supply of processed agricultural products to the market is necessary for survival of human beings. Minimization of the management cost of these products plays an important role in delivering them to customers with reasonable prices. Although single-manufacturer single-retailer two-tier supply chain (SC) models are available in the literature, there is a lack of a three-tier SC model concerning agricultural products. This study presents a three-tier joint economic lot size SC model of delivering agricultural products, consisting of a single seasonal supplier, a single manufacturer and multiple retailers. The demand of a product is assumed to be a deterministic constant. The objective is to find the number of shipments and shipments sizes in a cycle from the supplier to the recipient to minimize the total cost of ordering, setup, shipment and holding. The model is solved following both the algebraic and the differentiation methods. They are found to provide the same solution theoretically. Also, we develop an algorithm to find integer number of shipments to manufacturer and retailers in obtaining the minimal total cost solution to the problem. A sensitivity analysis on a solution of a numerical problem shows that a manager can control the frequency of shipments with an extra cost.

Coordinating a trust-embedded two-tier supply chain by options with multiple transaction periods

Trust widely works in supply chain practices and deeply affects supply chain decisions. Full trust in transactions and inaccurate demand forecasts are most likely to lead to biased decisions and low supply chain performances. Therefore, we propose a trust updating model to quantify decision-maker’s trust. The model presents the variation of trust over time and is helpful to evaluate decision-maker’s trust level in each transaction. In the model, a coordination mechanism with contract is designed to mitigate each supply chain partner’s ordering risk. Optimal order strategies of both manufactures and retailers in a supply chain under a bidirectional option contract are analysed in this paper. We find the manufacturer’s optimal production quantity is positively affected by penalty price in the contract and its bounds are given by simulation analysis. Our findings in this paper indicate that the proposed coordination mechanism with bidirectional option contract is profitable to all supply chain partners in long-term transactions. Meanwhile, the coordination mechanism helps the supply chain partners to catch up with marketing fluctuations and enhances the supply chain trust and partnerships. Finally, some simulation experiments are employed to obtain more observations.

Managing Social Responsibility in Multitier Supply Chains

We study the management of social responsibility in a three-tier supply chain in which a Tier 2 supplier sells to a Tier 1 supplier, which in turn sells to a Tier 0 buyer. The Tier 2 supplier potentially violates social and environmental standards, resulting in harm to the Tier 0 and 1 firms. Each member of the supply chain can exert effort to improve the responsibility in Tier 2, and the efforts of Tiers 0 and 1 are substitutable with one another and complementary to the efforts of Tier 2. We show that in this scenario the buyer’s optimal strategy is one of extremes, consisting of direct control (only Tier 0 works with Tier 2), delegation (only Tier 1 works with Tier 2), or no effort (neither firm works with Tier 2), and we characterize the features of Tiers 0, 1, and 2 that lead the buyer to favor each strategy. Under the buyer’s optimal strategy, we find that selection of Tier 1 and 2 suppliers for greater responsibility or lower cost, as well as increased pressure from external stakeholders (consumers, NGOs, and governments), may increase the chance of a responsibility violation when the buyer shifts from control to delegation. We further illustrate how responsibility management differ in three- and two-tier supply chains, and show that perverse reactions to better supplier selection and greater external stakeholder pressure never occur in a two-tier system, demonstrating the unique challenges associated with multitier responsibility management. Lastly, we show that appropriately designed non-compliance penalties to either Tier 0 or 1 when a Tier 2 violation occurs can coordinate the three-tier supply chain, i.e., make it perform like a two-tier system, though such penalties face implementation challenges in practice.

Incentive-Driven Information Dissemination in Two-Tier Supply Chains

We investigate information flow in two-tier supply chains, where retailers order from suppliers and sell in a market with uncertain demand. The retailers each have access to a demand signal and can exchange signals (horizontal information sharing). The suppliers can offer the retailers differential payments to gain access to their signals (vertical information acquisition). We demonstrate that retailer competition is a necessary condition to sustain information flow, whereas supplier competition precludes vertical information acquisition. Facing horizontal competition, the retailers can have an incentive to exchange signals if competition is less intense; and this incentive is stronger when they order from independent suppliers than when they order from a monopolist supplier. In the setting where two retailers order from a monopolist supplier, once the retailers exchange signals, the supplier will acquire signals from them both; otherwise, it will have an incentive to acquire signals if the signals are sufficiently correlated. It can be incentive compatible for horizontal information sharing and vertical information acquisition to coexist so that the retailers’ signals are available to all parties. Under this circumstance, the supplier will profit from information flow and the retailers can earn profit gains as well, whereas the consumers will be worse off.

Heterogeneity of Reference Points in the Competitive Newsvendor Problem

This paper incorporates the recently-proposed optimism-based reference point formulation into a competitive newsvendor model. The analysis shows that the heterogeneity of newsvendors' reference points can explain several regularities observed in recent experimental studies of newsvendor competition. Specifically, the observations that a behavioral newsvendor may ignore the orders of the competitor, receive a significantly smaller profit, or over-order when there is no expected demand overflow can all be attributed to the effects of heterogeneous reference points in our model's equilibrium. Extending the model to a two-tier supply chain also provides insights onto how behavioral biases impact wholesale price contracts.

Analysis of Two-tier Supply Chains with Multiplicative Random Yields

We consider a two-tier supply chain with multiplicative random yield. We focus on the supply chain performance with respect to the control scheme of determining the production lot size. The profit loss due to distributed control is analyzed to give an insight for devising efficient supply contracts.

Vertically Linked Industries, Product Quality and Minimum Quality Standards

Abstract This paper extends the seminal model of vertical product differentiation by Ronnen (1991) to a two-tier supply chain. While Ronnen considers the duopoly case, we add a vertical structure such that each downstream firm procures an input from a monopolistic upstream supplier. While simultaneous up- and downstream regulation in the form of a minimum quality standard restores Ronnen’s findings, if only one firm is regulated in the vertical chain, a free-rider effect results: all the bargaining power is given to the non-regulated member of the chain, which uses it to free-ride on the pressure exerted by the regulator onto the other member.

Impact of demand price elasticity on advantages of cooperative advertising in a two-tier supply chain

This paper focuses on pricing and vertical cooperative advertising decisions in a two-tier supply chain. Using a Stackelberg game model where the manufacturer acts as the game leader and the retailer acts as the game follower, we obtain closed-form equilibrium solution and explicitly show how pricing and advertising decisions are made. When market demand decreases exponentially with respect to the retail price and increases with respect to national and local advertising expenditures in an additive way, the manufacturer benefits from providing percentage reimbursement for the retailer’s local advertising expenditure when demand price elasticity is large enough. Whether the manufacturer benefits from cooperative advertising is also closely related to supply chain member’s relative advertising efficiency. In the decision for adopting coop advertising strategy, it is critical for the manufacturer to identify how market demand depends on national and local advertisements. The findings from this research can enhance our understanding of cooperative advertising decisions in a two-tier supply chain with price-dependent demand.

Energy Efficiency Contracting in Supply Chains Under Asymmetric Bargaining Power

Evidence shows that suppliers refrain from investing in energy efficiency (EE) measures because they fear that a buyer with greater bargaining power will use the EE-related cost reductions to push prices down, in the purchase bargaining process, and thereby further reduce the supplier's profit margin. Suppliers are also discouraged from EE investment by the uncertainty associated with new technologies. These issues are studied via our model of the bargaining process, in a two-tier supply chain, between a single supplier and buyer; we analyze how the supplier's EE technology adoption is affected by the buyer's relative bargaining power and also by technology uncertainty. We compare various contracting arrangements commonly used in industry to overcome these obstacles, including price commitment by the buyer and shared investment contracts while characterizing their optimal properties with respect to different criteria - in particular, supply chain profit and the equilibrium level of EE investment. In terms of both criteria, we find that shared investment contracts perform better than price commitment contracts, although the latter increase supplier profit when a buyer's bargaining power is relatively high. We also show that, in a two-player model, the bargaining process between firms moderates how uncertainty affects supplier's investment behavior.

Trust-embedded coordination in supply chain information sharing

This paper studies supply chain coordination with trust-embedded cost-sharing contract. In a two-tier supply chain, a retailer (she) and a supplier (he) make their private demand forecasting individually. The retailer places soft-orders, which are costless, non-verifiable and cancellable before shipping, to the supplier. After that, the supplier relies on the retailer’s ordering information to update his demand evaluation and prepare his capacity. How much the supplier relies on the retailer’s ordering information is specified by trust, which is a kind of psychological feeling and affected by multiple factors. When the supplier does not fully trust the retailer, he tends to prepare a conservative capacity to avoid over-production. To coordinate the supply chain, a two-stage coordination process is proposed. At the first stage, the supplier and retailer negotiate a cost-sharing rule to bind soft-orders. At the second stage, the retailer places a soft-order and decides whether or not to bind it referring to the cost-sharing rule. After that, the supplier determines his optimal production capacity. We show that the retailer and supplier value trust differently in the experimental studies. We also find that there is a threshold of negotiation power for the supply chain partners which means the supplier’s/retailer’s expected profit drops down if his/her negotiation power exceeds certain thresholds. The experimental studies also show that the proposed the two-stage coordination is effective.

Analysis of capacity constraints on the backlog bullwhip effect in the two-tier supply chain: a Taguchi approach

This paper investigates the impact of capacity constraints and safety stock on the backlog bullwhip effect in a model of a two-tier supply chain. One of the most commonly applied methodologies to study the various aspects of the Beer Game model is the control theoretic technique. It is clear that these control theoretic models are linear and cannot deal with non-linearities, such as capacity constraints. Thereafter, simulation experiments together with Taguchi design of experiments are performed to study non-linear impacts of capacity constraints in a two-tier supply chain. This research gives supply chain operations’ managers and designers a practical way to develop a trade-off between capacity and safety stock at different echelons and to take better decisions about their capacity and safety stocks. Future work should investigate the total cost implications of capacity constraints and safety stocks in a multi-echelon supply chain.

Trust, Trustworthiness, and Information Sharing in Supply Chains Bridging China and the United States

Whether and how trust and trustworthiness differ between a collectivist society, e.g., China, and an individualistic one, e.g., the United States, generates much ongoing scientific debate and bears significant practical values for managing cross-country transactions. We experimentally investigate how supply chain members' countries of origin—China versus the United States—affect trust, trustworthiness, and strategic information sharing behavior in a cross-country supply chain. We consider a two-tier supply chain in which the upstream supplier solicits demand forecast information from the retailer to plan production; but the retailer has an incentive to manipulate her forecast to ensure abundant supply. The levels of trust and trustworthiness in the supply chain and supplier's capability to determine the optimal production quantity affect the efficacy of forecast sharing and the resulting profits. We develop an experimental design to disentangle these three aspects and to allow for real-time interactions between geographically distant and culturally heterogeneous participants. We observe that, when there is no prospect for long-term interactions, our Chinese participants consistently exhibit lower spontaneous trust and trustworthiness than their U.S. counterparts do. We quantify the differences in trust and trustworthiness between the two countries, and the resulting impact on supply chain efficiency. We also show that Chinese individuals exhibit higher spontaneous trust toward U.S. partners than Chinese ones, primarily because they perceive that individuals from the United States are more trusting and trustworthy in general. This positive perception toward U.S. people is indeed consistent with the U.S. participants' behavior in forecast sharing. In addition, we quantify that a Chinese supply chain enjoys a larger efficiency gain from repeated interactions than a U.S. one does, as the prospect of building a long-term relationship successfully sustains trust and trustworthiness by Chinese partners. We advocate that companies can reinforce the positive perception of westerners held by the Chinese population and commit to long-term relationships to encourage trust by Chinese partners. Finally, we also observe that both populations exhibit similar pull-to-center bias when solving a decision problem under uncertainty (i.e., the newsvendor problem).Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1905 .This paper was accepted by Yossi Aviv, operations management.

Multidimensional utility analysis in a two-tier supply chain

Utility analysis is the measure of efficiency in supply chain, which is the function of strategy decided by supply chain players. The competition provided by the coopetitive (cooperation and competition) environment of new manufacturing systems demands analyzing the strategic interaction between two tiers of supply chains such as manufacturer–supplier. However, setting the optimal strategy for rational and intelligent players with conflicting interests is a challenging task for the supply chain managers. In this paper, the multidimensional utility concept is designed and developed for a social outcome with which every player is agreed without causing conflicts. The procurement process of Indian Railways Catering and Tourism Corporation (IRCTC) is studied for the multi-dimensional utility analysis with two parameters: quantity of interest and price per unit. Comparative analysis shows the proposed social utility outperforms the individual utilities of IRCTC and suppliers’ utilities. Based on the results, the framework for the procurement process of IRCTC has been proposed, which includes incentives for the players participating in the supply chain design process.

More than a second channel? Supply chain strategies in B2B spot markets

The emergence of B2B spot markets has greatly facilitated spot trading and impacted supply chain structures as well as the way commercial transactions take place between firms in many industries. While providing new opportunities, the B2B spot market also exposes participants to a price risk. This new business landscape raises some important questions on how the supplier and manufacturer should change their sales channel and procurement strategies and tailor their decisions to this changing environment. In this paper, we study the channel-choice, pricing and ordering/production decisions of the risk-averse supplier and manufacturer in a two-tier supply chain with a B2B spot market. Our analysis shows that, to benefit from the B2B spot market and control the risk exposure, the upstream supplier should develop an integrated channel-choice and pricing strategy. When the supplier adopts a dual-channel strategy, the equilibrium contract price decreases in the supplier’s risk attitude, but increases in the demand uncertainty. However, it first decreases and then increases in the manufacturer’s risk attitude and spot price volatility. We conclude that rather than simply being a second channel, the B2B spot market provides a strategic tool to supply chain members to achieve an advantageous position in their contract trading.

Transparency of Information Acquisition in a Supply Chain

A firm hires a consultant to acquire demand information. The outcome of information acquisition may turn out to be successful such that the firm learns much about the market demand, thus becoming “informed,” or unsuccessful such that it learns very little about the market demand, thus remaining “uninformed.” After the outcome becomes clear, the firm knows its information status, informed or uninformed, and the information content if informed. The client firm usually requires strict confidentiality that forbids the consultant to make any disclosure about the information acquisition, believing that greater informational advantage will surely be to its own benefits. As a result, neither the information content nor the information status is known to any third party. But should the firm always care so much about strict confidentiality? Will it be beneficial if the firm's information status, but not the information content, is known to its partners or any other firms? We investigate this issue in the context of a two-tier supply chain. A manufacturer offers a menu of contracts for supplying a product to a retailer who sells it in a market with random demand that has a known continuous distribution. The retailer hires a consultant to acquire demand information, with uncertain outcome. With probability t, the retailer becomes informed about the market demand, and with probability 1 − t, he remains uninformed, where the probability t can be regarded as representing the retailer's information acquisition capability. We find that disclosing its information status benefits the retailer if its information acquisition capability is less than stellar and the market variability is intermediate. Our investigation shows that there are benefits that are foregone by following strict confidentiality but can potentially be recovered by switching to a policy of partial confidentiality.

Incentives for a Retailer with Private Forecast Accuracy Information

We study a two-tier supply chain where a manufacturer faces a retailer privileged with private information about both the forecast signal and its accuracy from contracting before and after the retailer's forecast two aspects. To better understand the impact of these two types of asymmetric information, four information structures are investigated: no asymmetric information, only forecast signal is asymmetric information, only forecast accuracy is asymmetric information and both forecast signal and its accuracy are asymmetric information. It demonstrates that for all these four cases, the optimal incentive schemes designed for the retailer take on a threshold structure of the unit production cost. Meanwhile, contrary to the intuition and previous findings, we find that the high precision level forecast is not always the manufacturer's preference, which rests not only with the observed signal, but also with the manufacturer's unit production cost and the retailer's cost-efficiency of making a high precision level forecast. And more importantly, it shows that more private information (two-dimensional asymmetric information or one asymmetric information) does not necessarily make the retailer better off or make the manufacturer worse off, which depends on the values of the parameters such as the retailer price, the demand level, the manufacturer's belief about the retailer's private information, etc. Besides, for the same asymmetric information, the values of information on the specific information may be different. Finally, the value of contracting sequence is explored. And it indicates that no matter what the information structure is, contracting after the retailer's forecast is always more attractive to the manufacturer, whereas contracting before the retailer's forecast is more attractive to the retailer.

Potentially self-defeating: Group buying in a two-tier supply chain

Retailers have an incentive to cooperate in the form of group buying (GB) when a supplier provides quantity discounts, because wholesale price under GB depends on total purchasing quantity rather than individual purchasing (IP) quantity. Most previous studies on GB focus on the benefits that buyers get but ignore the supplier׳s response to GB. In this paper, we take the supplier׳s response into consideration, and present a game model with a single supplier and two symmetric competing retailers in two systems: the retailers purchase individually, and the retailers group buy. Under a general quantity discount schedule, each system has a unique sub-game perfect equilibrium. The comparison between IP and GB suggests that GB may sabotage the benefits of all members in the supply chain (i.e., the supplier, the retailers, and the consumer). Retailers may hold contradictory attitudes toward GB before and after the publishing of the discount schedule. These insights are shown to be robust for the case when more than two retailers are involved, as well as the case when the supplier enjoys economies of scale based on the order volume. We suggest that a mixed discount schedule may help prevent the potential damage of GB. In addition, with significant economies of scale, the supplier and retailers may be better off under GB. Then GB can be a favorable purchasing strategy.

The effect of supplier capacity on the supply chain profit

In this paper, we study the role of capacity on the efficiency of a two-tier supply chain with two suppliers (leaders, first tier) and one retailer (follower, second tier). The suppliers compete via pricing (Bertrand competition) and, as one would expect in practice, are faced with production capacity. We consider a model with differentiated substitutable products where the suppliers are symmetric differing only by their production capacity. We characterize the prices, production amounts and profits in three cases: (1) the suppliers compete in a decentralized Nash equilibrium game, (2) the suppliers “cooperate” to optimize the total suppliers’ profit, and (3) the two tiers of the supply chain are centrally coordinated. We show that in a decentralized setting, the supplier with a lower capacity may benefit from restricting her capacity even when additional capacity is available at no cost. We also show that the loss of total profit due to decentralization cannot exceed 25 % of the centralized chain profits. Nevertheless, the loss of total profit is not a monotonic function of the “degree of asymmetry” of the suppliers’ capacities. Furthermore, we provide an upper bound on the supplier profit loss at equilibrium (compared with the cooperation setting) that depends on the “market power” of the suppliers as well as their market size. We show that there is less supplier profit loss as the asymmetry (in terms of their capacities) increases between the two suppliers. The worst case arises when the two suppliers are completely symmetric.