Designing Multi-Period Supply Contracts in a Two-Echelon Supply Chain Asymmetric Information

Posted: 2 Nov 2016

See all articles by Zahra Mobini

Zahra Mobini

Erasmus Research Institute of Management (ERIM)

Wilco van den Heuvel

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Albert P. M. Wagelmans

Erasmus University Rotterdam (EUR) - Erasmus Center for Optimization in Public Transport (ECOPT); Erasmus University Rotterdam (EUR) - Department of Econometrics

Date Written: November 1, 2016

Abstract

We study a two-echelon supply chain consisting of a supplier and a retailer, where the supplier uses a simple and easily implementable incentive scheme - making a side payment - to influence the retailer’s ordering plan. The supplier makes a take-it-or-leave-it offer to the retailer in the form of a menu of contracts, each consisting of a procurement plan plus a side payment. The retailer, who possesses private information about customer demand and his cost parameters, either accepts one of the contracts or imposes his own optimal plan. We formulate the supplier’s problem of designing optimal contracts with the realistic assumption that the retailer’s outside option depends on his private information. Taking into account the retailer’s reaction to the proposed offer, the supplier faces a nested (bi-level) optimization problem, which we transform into a single-level mixed integer programming formulation. In our analysis, we use a network interpretation for the set of incentive constraints and show some properties of optimal contracts. This enables us to considerably reduce the number of incentive constraints and to find optimal values of the side payment quantities. Our findings regarding the possible behavior of the opportunistic retailer deviate from those of previous studies as a result of considering more realistic assumptions.

Keywords: Supply Chain Contracting, Coordination Mechanisms, Lot-Sizing, Asymmetric Information

Suggested Citation

Mobini, Zahra and van den Heuvel, Wilco and Wagelmans, Albert P. M., Designing Multi-Period Supply Contracts in a Two-Echelon Supply Chain Asymmetric Information (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2862652

Zahra Mobini (Contact Author)

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Wilco Van den Heuvel

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 40 81307 (Phone)

Albert P. M. Wagelmans

Erasmus University Rotterdam (EUR) - Erasmus Center for Optimization in Public Transport (ECOPT) ( email )

3000 DR Rotterdam
Netherlands
+31 10 408 2576 (Phone)
+31 10 408 9162 (Fax)

Erasmus University Rotterdam (EUR) - Department of Econometrics

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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