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

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  • Wang, Yulan
  • Zipkin, Paul

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.

Suggested Citation

  • Wang, Yulan & Zipkin, Paul, 2009. "Agents' incentives under buy-back contracts in a two-stage supply chain," International Journal of Production Economics, Elsevier, vol. 120(2), pages 525-539, August.
    • Handle: RePEc:eee:proeco:v:120:y:2009:i:2:p:525-539
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    Cited by:

    1. Yulan Wang & Baozhuang Niu & Pengfei Guo & Jing-Sheng Song, 2021. "Direct Sourcing or Agent Sourcing? Contract Negotiation in Procurement Outsourcing," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 294-310, March.
    2. Ruiz-Benitez, Rocio & Muriel, Ana, 2014. "Consumer returns in a decentralized supply chain," International Journal of Production Economics, Elsevier, vol. 147(PC), pages 573-592.
    3. Guoming Lai & Laurens Debo & Lin Nan, 2011. "Channel Stuffing with Short-Term Interest in Market Value," Management Science, INFORMS, vol. 57(2), pages 332-346, February.
    4. Baozhuang Niu & Lei Chen & Jie Zhang, 2017. "Sustainability Analysis of Supply Chains with Fashion Products under Alternative Power Structures and Loss-Averse Supplier," Sustainability, MDPI, vol. 9(6), pages 1-19, June.
    5. Wei, Ying & Choi, Tsan-Ming, 2010. "Mean-variance analysis of supply chains under wholesale pricing and profit sharing schemes," European Journal of Operational Research, Elsevier, vol. 204(2), pages 255-262, July.
    6. Fu, Hong & Ma, Yongkai & Cai, Xiaoqiang, 2018. "Downstream firm’s investment with equity holding in decentralized assembly systems," Omega, Elsevier, vol. 75(C), pages 27-56.
    7. Sung Wook Yoon & Suk Jae Jeong, 2016. "Implementing Coordinative Contracts between Manufacturer and Retailer in a Reverse Supply Chain," Sustainability, MDPI, vol. 8(9), pages 1-15, September.
    8. Michael Krapp & Johannes B. Kraus, 2019. "Coordination contracts for reverse supply chains: a state-of-the-art review," Journal of Business Economics, Springer, vol. 89(7), pages 747-792, September.
    9. Zhu, Xiaoliang & Guo, Zixue & Yang, Guoqing, 2023. "Credit coguarantee loan buyback contracts: Equilibrium and coordination strategies," International Journal of Production Economics, Elsevier, vol. 262(C).
    10. Xiao, Tiaojun & Shi, Kuiran & Yang, Danqin, 2010. "Coordination of a supply chain with consumer return under demand uncertainty," International Journal of Production Economics, Elsevier, vol. 124(1), pages 171-180, March.

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    Buy-back Supply chain Compensation;

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