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Decentralized Multi-Echelon Supply Chains: Incentives and Information

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Author Info

  • Hau Lee

    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Seungjin Whang

    (Graduate School of Business, Stanford University, Stanford, California 94305)

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    Abstract

    Consider a supply chain in which a product must pass through multiple sites located in series before it is finally delivered to outside customers. Incentive problems may arise in this system when decisions are delegated to corresponding site managers, each maximizing his/her own performance metric. From the overall system's point of view, the decentralized supply chain may not be as efficient as the centralized one. In practice, alternative performance mechanisms are often used to align the incentives of the different managers in a supply chain. This paper discusses the cost conservation, incentive compatibility, and informational decentralizability properties of these mechanisms. In particular, for a special type of supply chain, we show that a performance measurement scheme involving transfer pricing, consignment, shortage reimbursement, and an additional backlog penalty at the last downstream site satisfies all these properties.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.5.633
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 5 (May)
    Pages: 633-640

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:5:p:633-640

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    Related research

    Keywords: supply chain management; incentive alignment; decentralized control; multi-echelon inventory systems; information management;

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    Cited by:
    1. Canan Savaskan & Charles J. Corbett, 2001. "Contracting and Coordination in Closed-Loop Supply Chains," Discussion Papers 1327, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Leng, Mingming & Zhu, An, 2009. "Side-payment contracts in two-person nonzero-sum supply chain games: Review, discussion and applications," European Journal of Operational Research, Elsevier, vol. 196(2), pages 600-618, July.
    3. Seifert, Ralf W. & Thonemann, Ulrich W. & Sieke, Marcel A., 2006. "Integrating direct and indirect sales channels under decentralized decision-making," International Journal of Production Economics, Elsevier, vol. 103(1), pages 209-229, September.
    4. Dudek, Gregor & Stadtler, Hartmut, 2005. "Negotiation-based collaborative planning between supply chains partners," European Journal of Operational Research, Elsevier, vol. 163(3), pages 668-687, June.
    5. Toktas-Palut, Peral & Ülengin, Füsun, 2011. "Coordination in a two-stage capacitated supply chain with multiple suppliers," European Journal of Operational Research, Elsevier, vol. 212(1), pages 43-53, July.
    6. Mallik, Suman & Harker, Patrick T., 2004. "Coordinating supply chains with competition: Capacity allocation in semiconductor manufacturing," European Journal of Operational Research, Elsevier, vol. 159(2), pages 330-347, December.
    7. Schneeweiss, Christoph & Zimmer, Kirstin, 2004. "Hierarchical coordination mechanisms within the supply chain," European Journal of Operational Research, Elsevier, vol. 153(3), pages 687-703, March.
    8. Chu, Chi-Leung & Leon, V. Jorge, 2008. "Single-vendor multi-buyer inventory coordination under private information," European Journal of Operational Research, Elsevier, vol. 191(2), pages 485-503, December.
    9. Zhou, Yong-Wu, 2009. "Two-echelon supply chain coordination through the unified number of annual orders," International Journal of Production Economics, Elsevier, vol. 117(1), pages 162-173, January.
    10. Bauso, Dario & Giarré, Laura & Pesenti, Raffaele, 2009. "Distributed consensus in noncooperative inventory games," European Journal of Operational Research, Elsevier, vol. 192(3), pages 866-878, February.
    11. Son, Joong Y. & Sheu, Chwen, 2008. "The impact of replenishment policy deviations in a decentralized supply chain," International Journal of Production Economics, Elsevier, vol. 113(2), pages 785-804, June.
    12. Akkermans, H.A., 2001. "Emergent supply networks: System dynamics simulation of adaptive supply agents," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5374066, Tilburg University.
    13. Wang, Hongwei & Guo, Min & Efstathiou, Janet, 2004. "A game-theoretical cooperative mechanism design for a two-echelon decentralized supply chain," European Journal of Operational Research, Elsevier, vol. 157(2), pages 372-388, September.
    14. Kim, Jindae & Tang, Kaizhi & Kumara, Soundar & Yee, Shang-Tae & Tew, Jeffrey, 2008. "Value analysis of location-enabled radio-frequency identification information on delivery chain performance," International Journal of Production Economics, Elsevier, vol. 112(1), pages 403-415, March.
    15. Chu, Hongsheng & Wang, Jingchun & Jin, Yihui & Suo, Hansheng, 2006. "Decentralized inventory control in a two-component assembly system," International Journal of Production Economics, Elsevier, vol. 102(2), pages 255-264, August.
    16. Akkermans, Henk & Bogerd, Paul & van Doremalen, Jan, 2004. "Travail, transparency and trust: A case study of computer-supported collaborative supply chain planning in high-tech electronics," European Journal of Operational Research, Elsevier, vol. 153(2), pages 445-456, March.
    17. Li, Xiuhui & Wang, Qinan, 2007. "Coordination mechanisms of supply chain systems," European Journal of Operational Research, Elsevier, vol. 179(1), pages 1-16, May.
    18. Corbett, Charles J. & DeCroix, Gregory A. & Ha, Albert Y., 2005. "Optimal shared-savings contracts in supply chains: Linear contracts and double moral hazard," European Journal of Operational Research, Elsevier, vol. 163(3), pages 653-667, June.
    19. Giannoccaro, Ilaria & Pontrandolfo, Pierpaolo, 2009. "Negotiation of the revenue sharing contract: An agent-based systems approach," International Journal of Production Economics, Elsevier, vol. 122(2), pages 558-566, December.
    20. Huang, George Q. & Qu, T., 2008. "Extending analytical target cascading for optimal configuration of supply chains with alternative autonomous suppliers," International Journal of Production Economics, Elsevier, vol. 115(1), pages 39-54, September.
    21. Kwak, Jin Kyung & Gavirneni, Srinagesh, 2011. "Retailer policy, uncertainty reduction, and supply chain performance," International Journal of Production Economics, Elsevier, vol. 132(2), pages 271-278, August.
    22. Bellantuono, Nicola & Giannoccaro, Ilaria & Pontrandolfo, Pierpaolo & Tang, Christopher S., 2009. "The implications of joint adoption of revenue sharing and advance booking discount programs," International Journal of Production Economics, Elsevier, vol. 121(2), pages 383-394, October.
    23. Natarajan, Ramachandran & Sethuraman, Kannan & Surysekar, Krishnamurthy, 2005. "Reducing incremental costs associated with the delegation of incentive contracting decisions: An analysis of planning and control decisions in a manufacturing setting in the presence of moral hazard," European Journal of Operational Research, Elsevier, vol. 162(3), pages 816-838, May.

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