Coordinating contracts in cooperative supply networks

Abstract

It is widely accepted that the decentralization process exerts negative influence on the supply chain economic performance relatively to the case of an integrated supply chain in terms of total supply chain profit. In other words, a decentralized supply chain is less efficient than a centralized one, as in a decentralized supply chain each separate member tends to maximize his own benefits and pursue his private objectives, even if it harms the system wide performance. Coordination, in turn, helps to mitigate these negative effects of a decentralized decision-making. Nevertheless, coordination may be hard to achieve if some of the supply chain members are competing with each other, which leads to a new line of research on such systems, referred to as supply networks. Supply chain contract can be an effective coordination mechanism to motivate supply network members to be a part of entire system, in order to improve individual and system wide performance. There are different types of contracts, such as revenue-sharing, quantity-discount and other. The objective of the paper is methodology improvement of contract selection in cooperative supply networks for achieving better supply network economic performance. The research was focused on a two-level standard newsvendor model, which was adapted in order to reflect the situation of competing retailers. The methodology of coordination contracts decision-making was developed by devising a mechanism for contract selection for the case of multi-echelon supply network with two competing retailers enabling coordination at a system-wide level. The proposed model is a novel approach in applying coordination theory at systems with inside competition.