Agents' incentives under buy-back contracts in a two-stage supply chain

Yulan Wang, Paul Zipkin

Research output: Journal article publicationJournal articleAcademic researchpeer-review

35 Citations (Scopus)

Abstract

This paper investigates how the behavior of individual decision makers can affect the performance of a supply chain. We study a two-stage supplier-retailer system, using a buy-back contract. Each firm's actions are executed by an agent. The retailer's purchasing agent and the supplier's sales agent are compensated based on certain performance measures, and they act accordingly. We study the impacts of their behavior in both the supplier-as-leader and retailer-as-leader settings. We find that, unless their incentives are carefully constructed, the agents can strongly distort the system's behavior. Specifically, "channel stuffing" (packing the distribution channel with excess inventory) can occur in both settings. Only when the agents are compensated based on net profit do they act in accord with their firms' objectives. These results may help explain some recent scandals.
Original languageEnglish
Pages (from-to)525-539
Number of pages15
JournalInternational Journal of Production Economics
Volume120
Issue number2
DOIs
Publication statusPublished - 1 Aug 2009

Keywords

  • Buy-back
  • Compensation
  • Supply chain

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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