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Supply Chain Performance with Target-Oriented Firms

Author

Listed:
  • Lucy Gongtao Chen

    (NUS Business School, National University of Singapore, Singapore 119245, Singapore)

  • Qinshen Tang

    (Nanyang Business School, Nanyang Technological University, Singapore 639798, Singapore)

Abstract

Problem definition : We study a supply chain in which a supplier sets the wholesale price and a retailer responds with an order quantity. Both of the two firms can be either risk-neutral—maximizing the expected profit—or target-oriented, which is to maximize her or his ability to reach a target profit. Academic/practical relevance : Our work not only sheds light on the benefit/loss of trading with target-oriented decision makers but also, adds new knowledge to the supply chain coordination literature. Methodology : We provide strong support for firms’ target-based preference and the linear target formation model through a survey as well as analyzing company data. With the firms’ target-oriented behavior evaluated by a CVaR-satisficing measure, we apply a game theoretical framework to investigate how the target-based preference affects supply chain performance. Results : A firm, be it a supplier or a retailer, is always hurt by its target-based preference but can benefit from its trading partner’s target-based preference. A risk-neutral supplier, for example, can sometimes reap the whole supply chain’s profit if the retailer is target-oriented, and a target-oriented supplier always performs better with a target-oriented retailer than a risk-neutral one. Furthermore, a target-oriented retailer and/or supplier can help alleviate the double-marginalization effect and with a specific target, can help the supply chain achieve the same efficiency level as in a risk-neutral centralized system, with just a wholesale price contract. Another important finding is that if both firms are target-oriented, then the supply chain can have a higher expected profit under a decentralized system than a centralized one. This contrasts with the case when both firms are risk-neutral. We also investigate the role of outside option and retailer-type misidentification and find that both can alleviate the retailer’s disadvantage of being target-oriented. Managerial implications : (i) The target-based preference can be exploited by the trading partner, and hence, a firm should adopt the target-oriented decision criterion with caution. (ii) A target-oriented retailer can explore strategies such as revealing his outside option or hiding his target-based preference in order to be less manipulated. (iii) Whether a firm (and the supply chain) can benefit from its trading partner’s target-based preference often depends on how ambitious the trading partner (and the firm itself if it is target-oriented) sets the target. (iv) Target-based preference of one or both firms can help the supply chain reach the first-best efficiency. (v) When both firms are target-oriented, decentralization can be preferred to centralization.

Suggested Citation

  • Lucy Gongtao Chen & Qinshen Tang, 2022. "Supply Chain Performance with Target-Oriented Firms," Manufacturing & Service Operations Management, INFORMS, vol. 24(3), pages 1714-1732, May.
    • Handle: RePEc:inm:ormsom:v:24:y:2022:i:3:p:1714-1732
    DOI: 10.1287/msom.2021.1029
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    References listed on IDEAS

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