TY - JOUR
T1 - Coordinating supply chains with uncertain production cost by incomplete contracts
AU - Zhao, Shouting
AU - Zhang, Juliang
AU - Cheng, T. C.E.
N1 - Funding Information:
This work was supported in part by the National Natural Science Foundation of China under (grant numbers 71661167009, and 71711530714), NSFC/RGC under grant number 3-RAA7, and Beijing Logistics Informatics Research Base. Cheng was also supported in part by The Hong Kong Polytechnic University under the Fung Yiu King-Wing Hang Bank Endowed Professorship in Business Administration.
Publisher Copyright:
© 2020 Informa UK Limited, trading as Taylor & Francis Group.
Copyright:
Copyright 2020 Elsevier B.V., All rights reserved.
PY - 2020
Y1 - 2020
N2 - Production cost affects heavily supply chain coordination, but it is uncertain in many cases. We consider a supply chain consisting of a manufacturer and a retailer, where the unit production cost is uncertain when the firms sign a procurement contract. We derive the optimal decisions and profits for the centralised and decentralised cases. We show that production cost uncertainty exaggerates the supply chain’s incentive conflict, but may increase the expected profit in the centralised decision case. Then we design an incomplete contract, which sets a wholesale price and an order quantity in the first stage, which the firms can re-negotiate after the production cost is realised in the second stage. We prove that such an incomplete contract can lead to the first best outcome. We further consider the case with asymmetric cost information and show that the incomplete contract can also coordinate the supply chain. Furthermore, we discuss how the degree of contract incompleteness, re-negotiation freedom, and residual control rights affect the supply chain performance. The results reveal that the hold-up problem is prone to occur with improper contract incompleteness, re-negotiation freedom, and residual control rights, while the incomplete contract we propose can effectively avoid the problem.
AB - Production cost affects heavily supply chain coordination, but it is uncertain in many cases. We consider a supply chain consisting of a manufacturer and a retailer, where the unit production cost is uncertain when the firms sign a procurement contract. We derive the optimal decisions and profits for the centralised and decentralised cases. We show that production cost uncertainty exaggerates the supply chain’s incentive conflict, but may increase the expected profit in the centralised decision case. Then we design an incomplete contract, which sets a wholesale price and an order quantity in the first stage, which the firms can re-negotiate after the production cost is realised in the second stage. We prove that such an incomplete contract can lead to the first best outcome. We further consider the case with asymmetric cost information and show that the incomplete contract can also coordinate the supply chain. Furthermore, we discuss how the degree of contract incompleteness, re-negotiation freedom, and residual control rights affect the supply chain performance. The results reveal that the hold-up problem is prone to occur with improper contract incompleteness, re-negotiation freedom, and residual control rights, while the incomplete contract we propose can effectively avoid the problem.
KW - incomplete contracts
KW - Nash bargaining
KW - re-negotiation
KW - Supply chain coordination
KW - uncertain production cost
UR - http://www.scopus.com/inward/record.url?scp=85098497534&partnerID=8YFLogxK
U2 - 10.1080/00207543.2020.1856957
DO - 10.1080/00207543.2020.1856957
M3 - Journal article
AN - SCOPUS:85098497534
SN - 0020-7543
JO - International Journal of Production Research
JF - International Journal of Production Research
ER -