How to Coordinate the Supply Chain to Reduce Procurement Costs Risk Under Production Cost Uncertainty

Price volatility incurred by the suppliers’ uncertain production costs poses a significant challenge for DiDi, and a complete contract fails to coordinate the supply chain and effectively cope with such risk. Motivated by the procurement practices of DiDi’s two-wheeler supply chain department, this paper examines a two-level supply chain consisting of a supplier and a buyer (DiDi). The supplier’s production cost may fluctuate until the implementation of the contract. We first explore the limitations of the complete contract in managing the supply chain with uncertain production costs. Then we propose an incomplete contract that allows for renegotiations of the wholesale price and the purchase quantity in the contract implementation stage where the supplier’s production cost is determined. We demonstrate that such incomplete contracts can incentivize the supplier to enhance his production capacity, thereby increasing the buyer’s purchase quantity and improving supply chain coordination. Furthermore, we further show that neither the unconstrained incomplete contract in the initial trading stage nor the complete contract can effectively handle production cost uncertainty. In addition, we develop a dual-source procurement model considering the presence of substitutable products in the market. We show that an incomplete contract can still coordinate the supply and is effective in handling the production cost uncertainty. This study not only extends the theoretical understanding of contract dynamics under production cost uncertainty but also offers practical insights for companies like DiDi to address this challenge.