The Benefits of Decentralized Decision-Making in Supply Chains

35 Pages Posted: 4 Sep 2012

See all articles by Elena Belavina

Elena Belavina

Cornell SC Johnson College of Business

Karan Girotra

Cornell Tech; Cornell SC Johnson College of Business

Date Written: September 4, 2012

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.

Suggested Citation

Belavina, Elena and Girotra, Karan, The Benefits of Decentralized Decision-Making in Supply Chains (September 4, 2012). INSEAD Working Paper No. 2012/79/TOM. Available at SSRN: https://ssrn.com/abstract=2141214 or http://dx.doi.org/10.2139/ssrn.2141214

Elena Belavina

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Karan Girotra (Contact Author)

Cornell Tech ( email )

111 8th Avenue #302
New York, NY 10011
United States

HOME PAGE: http://www.girotra.com

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

HOME PAGE: http://www.girotra.com

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