Better to Bend than to Break: Sharing Supply Risk Using the Supply-Flexibility Contract

2020 ◽  
Author(s):  
Mehdi H. Farahani ◽  
Milind Dawande ◽  
Haresh Gurnani ◽  
Ganesh Janakiraman
Keyword(s):  
Supply Chain ◽  
Ad Hoc ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Problem Definition ◽  
Supply Risk ◽  
Supply Source ◽  
Regular Production ◽  
Disruption Risk ◽  
Supply Flexibility

Problem definition: We analyze a contract in which a supplier who is exposed to disruption risk offers a supply-flexibility contract comprising of a wholesale price and a minimum-delivery fraction (“flexibility” fraction) to a buyer facing random demand. The supplier is allowed to deviate below the order quantity by at most the flexibility fraction. The supplier’s regular production is subject to random disruption, but she has access to a reliable expedited supply source at a higher marginal cost. Academic/practical relevance: Despite the prevalence of supply-flexibility contracts in practice, to the best of our knowledge, there is no previous academic literature examining the optimal design of supply-flexibility contracts. As such, the level of flexibility in practice is usually set on an ad-hoc basis, with buyers typically reluctant to share risk with suppliers. Our analysis of supply-flexibility contracts informs practice in two ways: First, using analytically supported arguments, it educates managers on the effects of their decisions on the economic outcomes. Second, it shows that the supply-flexibility contract benefits both the supplier and the buyer, regardless of which player chooses how supply risk is allocated in the supply chain. Methodology: Non-cooperative game theory, non-convex optimization. Results: We derive the supplier-led optimal contract and show that supply chain efficiency improves relative to the price-only contract. More interestingly, even though the buyer lets the supplier decide how the two share supply risk, profits of both the players increase by the introduction of flexibility into the contract. Further, supply flexibility may be even more valuable for the buyer compared with the supplier. Interestingly, the flexibility fraction is not monotone in supplier reliability and a more reliable supplier may even prefer to transfer more risk to the buyer. The robustness of these findings is established on two extensions: one where we study a buyer-led contract (i.e., the buyer chooses the flexibility fraction) and the other where the expedited supply option is available to both the supplier and the buyer. Managerial implications: The supply-flexibility contract is mutually beneficial for both players and yet retains all the advantages of the price-only contract—it is easy to implement, it requires minimal operational and administrative burden, and there is evidence of the use of such contracts in practice. While our focus is not on supply chain coordination, we note that the combination of two mechanisms—the supply-flexibility contract derived in this paper to share supply risk and a buyback contract to share demand risk—yields a coordinating contract.

Supply Chain Coordination for E-Commerce: Risk Penalty vs. Flat Rate

2021 ◽  
Author(s):  
Ju Myung Song ◽  
Yao Zhao
Keyword(s):  
Supply Chain ◽  
Information Asymmetry ◽  
Risk Sharing ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Problem Definition ◽  
Third Party ◽  
Common Belief ◽  
Shipping Industry ◽  
Flat Rate

Problem definition: We study the coordination of an E-commerce supply chain between online sellers and third party shippers to meet random demand surges, induced by, for instance, online shopping holidays. Academic/practical relevance: Motivated by the challenge of meeting the unpredictable demand surges in E-commerce, we study shipping contracts and supply chain coordination between online sellers and third party shippers in a novel model taking into account the unique features of the shipping industry. Methodology: We compare two shipping contracts: the risk penalty (proposed by UPS) and the flat rate (used by FedEx), and analyze their impact on the seller, the shipper, and the supply chain. Results: Under information symmetry, the sophisticated risk penalty contract is no better than the simple flat rate contract for the shipper, against common belief. Although both the risk penalty and the flat rate can coordinate the supply chain, the risk penalty does so only if the shipper makes zero profit, but the flat rate can provide a positive profit for both. These results represent a new form of double marginalization and risk-sharing, in sharp contrast to the well-known literature on the classic supplier-retailer supply chain, where risk-sharing contracts (similar to the risk penalty) can bring benefits to all parties, but the single wholesale price contract (similar to the flat rate) can achieve supply chain coordination only when the supplier makes zero profit. We also find that only the online seller, but not the shipper, has the motivation to vertically integrate the seller-shipper supply chain. Under information asymmetry, however, the risk penalty brings more benefit to the shipper than the flat rate, but hurts the seller and the supply chain. Managerial implications: Our results imply that information plays an important role in the shipper’s choices of shipping contracts. Under information symmetry, the risk penalty is unnecessarily complex because the simple flat rate is as good as the risk penalty for the shipper; moreover, it is better for the seller-shipper coordination. However, under information asymmetry, the shipper faces additional shipping risk that can be offset by the extra flexibility of the risk penalty. Our study also explains and supports the recent practice of online sellers (e.g., Amazon.com and JD.com), but not shippers, to vertically integrate the supply chain by consistently expanding their shipping capabilities.

Coordinating Vulnerable Supply Chains with Option Contracts

2021 ◽  
pp. 2050053
Author(s):  
Zhongyi Liu ◽  
Shengya Hua ◽  
Guanying Wang
Keyword(s):  
Supply Chain ◽  
Risk Aversion ◽  
Value At Risk ◽  
Numerical Study ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Conditional Value At Risk ◽  
Option Contract ◽  
Risk Neutral ◽  
Disruption Risk

We investigate vulnerable supply chain coordination with an option contract in the presence of supply chain disruption risk caused by external and internal disturbances. The supply chain consists of a single risk-neutral supplier and a risk-averse retailer. We characterize the retailer’s order quantity decision under the Conditional Value-at-Risk (CVaR) criterion and the supplier’s production decision. The results show that facing disruption risk and risk-aversion, both the retailer and the supplier would be more prudent to order and produce less than the risk-neutral scenario, inducing damage to the supply chain performance. The number of options purchased is decreasing in disruption risk and the risk-aversion of the retailer. The supplier will increase production as the disruption risk decreases or the shortage penalty increases. When the supplier does not know the risk-aversion of the retailer, the former will produce more and bear a higher overstock risk. We also investigate conditions that facilitate vulnerable supply chain coordination and find that the existence of risk-aversion and disruption risk restrict the option price and exercise price to lower price levels. Finally, we compare the option contract with wholesale price contract from the supplier’s and retailer’s perspectives through a numerical study.

scholarly journals Contract Coordination in Dual Sourcing Supply Chain under Supply Disruption Risk

2015 ◽  
Vol 2015 ◽  
pp. 1-10 ◽  
Author(s):  
Tong Shu ◽  
Fang Yang ◽  
Shou Chen ◽  
Shouyang Wang ◽  
Kin Keung Lai ◽  
...  
Keyword(s):  
Supply Chain ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Order Quantity ◽  
Product Price ◽  
Strike Price ◽  
Supply Disruption ◽  
Dual Sourcing ◽  
Coordination Model ◽  
Disruption Risk

This paper explores a coordination model for a three-echelon supply chain including two different manufacturers, one distributer and one retailer via the combined option and back contracts. And one manufacturer provides the high wholesale price with low supply disruption risk and the other is completely the opposite. This differs from the previous supply chain coordination model. Firstly, supply disruption is added to the three-echelon supply chain. Secondly, considering the coordination of the supply chain, we deploy the combined option and back contracts which are seldom used in the previous study. Furthermore, it is interesting that supply disruption risk and buyback factor do not affect the distributor’s order quantity from the manufacturer who has low product price and unreliable operating ability, while the order quantity increases with the rise of option premium and option strike price. The distributor’s order quantity from the manufacturer, which has high product price and reliable operating ability, increases with the rise of supply disruption risk but decreases when the buyback factor, option premium, and option strike price decrease.

Implications of Price Matching in Supply Chain Negotiation

2021 ◽  
Author(s):  
Weixin Shang ◽  
Gangshu (George) Cai
Keyword(s):  
Supply Chain ◽  
Social Welfare ◽  
Wholesale Price ◽  
Consumer Welfare ◽  
Problem Definition ◽  
Nash Bargaining ◽  
Price Matching ◽  
The Impact ◽  
Multiple Buyers ◽  
Wholesale Pricing

Problem definition: Few papers have explored the impact of price matching negotiation (PM), in which a channel matches its price with the resulting wholesale price bargained by another channel, on firms’ performances, consumer welfare, and social welfare, with and without supply chain coordination. Academic/practical relevance: Negotiation has been widely seen in determining both uniform and discriminatory wholesale prices, which affect outcomes of competitive supply chain practices. Methodology: To characterize the PM mechanism, we use game theory and Nash bargaining theory to compare PM with simultaneous negotiation (SN) through a common-seller two-buyer differentiated Bertrand competition model. Results: Our analysis reveals that PM can benefit the seller but hurt all buyers, which is at odds with some fair wholesale pricing clauses intending to protect buyers. Under coordination with side payments, however, all firms can conditionally benefit more from PM than from SN. Despite firms’ gains, PM leads to less consumer utility and social welfare compared with SN, unless the second buyer in PM is considerably less powerful than the first buyer. Coordination further worsens PM’s negative impact on consumer utility and social welfare. Moreover, the existence of a spot market can increase the wholesale price in PM, hurting buyers, consumers, and society. Furthermore, the qualitative results about PM remain robust under an alternative disagreement point for PM, multiple buyers, and other extensions. Managerial implications: This paper delivers insights on when price matching in supply chain wholesale price negotiation can benefit a seller, buyers, consumers, and society in a variety of scenarios. It advocates how managers can use PM to their own advantages and provides rationale to decision makers for policy regulations regarding wholesale pricing.

scholarly journals Emergency Coordination Model of Fresh Agricultural Products’ Three-Level Supply Chain with Asymmetric Information

2016 ◽  
Vol 2016 ◽  
pp. 1-9 ◽  
Author(s):  
Juan Yang ◽  
Haorui Liu ◽  
Xuedou Yu ◽  
Fenghua Xiao
Keyword(s):  
Supply Chain ◽  
Asymmetric Information ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Nonlinear Function ◽  
Retail Price ◽  
Agricultural Products ◽  
Agricultural Product ◽  
Coordination Model ◽  
Emergency Events

In consideration of influence of loss, freshness, and secret retailer cost of products, how to handle emergency events during three-level supply chain is researched when market need is presumed to be a nonlinear function with retail price in fresh agricultural product market. Centralized and decentralized supply chain coordination models are studied based on asymmetric information. Optimal strategy of supply chain in dealing with retail price perturbation is caused by emergency events. The research reveals robustness for optimal production planning, wholesale price for distributors, wholesale price for retailers, and retail price of three-level supply chain about fresh agricultural products. The above four factors can keep constant within a certain perturbation of expectation costs for retailers because of emergency events; the conclusions are verified by numerical simulation. This paper also can be used for reference to the other related studies in how to coordinate the supply chain under asymmetric and punctual researches information response to disruptions.

Coordination of Multiechelon Supply Chains Using the Guaranteed Service Framework

2021 ◽  
Author(s):  
Tor Schoenmeyr ◽  
Stephen C. Graves
Keyword(s):  
Supply Chain ◽  
Wholesale Price ◽  
Problem Definition ◽  
Quantity Discounts ◽  
Minimum Order ◽  
Base Stock Policy ◽  
Decentralized Decision Making ◽  
Guaranteed Service ◽  
Stock Policy ◽  
Different Parts

Problem definition: We use the guaranteed service (GS) framework to investigate how to coordinate a multiechelon supply chain when two self-interested parties control different parts of the supply chain. For purposes of supply chain planning, we assume that each stage in a supply chain operates with a local base-stock policy and can provide guaranteed service to its customers, as long as the customer demand falls within certain bounds. Academic/practical relevance: The GS framework for supply chain inventory optimization has been deployed successfully in multiple industrial contexts with centralized control. In this paper, we show how to apply this framework to achieve coordination in a decentralized setting in which two parties control different parts of the supply chain. Methodology: The primary methodology is the analysis of a multiechelon supply chain under the assumptions of the GS model. Results: We find that the GS framework is naturally well suited for this decentralized decision making, and we propose a specific contract structure that facilitates such relationships. This contract is incentive compatible and has several other desirable properties. Under assumptions of complete and incomplete information, a reasonable negotiation process should lead the parties to contract terms that coordinate the supply chain. The contract is simpler than contracts proposed for coordination in the stochastic service (SS) framework. We also highlight the role of markup on the holding costs and some of the difficulties that this might cause in coordinating a decentralized supply chain. Managerial implications: The value from the paper is to show that a simple contract coordinates the chain when both parties plan with a GS model and framework; hence, we provide more evidence for the utility of this model. Furthermore, the simple coordinating contract matches reasonably well with practice; we observe that the most common contract terms include a per-unit wholesale price (possibly with a minimum order quantity and/or quantity discounts), along with a service time from order placement until delivery or until ready to ship. We also observe that firms need to pay a higher price if they want better service. What may differ from practice is the contract provision of a demand bound; our contract specifies that the supplier will provide GS as long as the buyer’s order are within the agreed on demand bound. This provision is essential so that each party can apply the GS framework for planning their supply chain. Of course, contracts have many other provisions for handling exceptions. Nevertheless, our research provides some validation for the GS model and the contracting practices we observe in practice.

scholarly journals Supply Chain Coordination with a Loss-Averse Retailer and Combined Contract

Mathematics ◽  
2020 ◽  
Vol 8 (4) ◽  
pp. 586
Author(s):  
Wei Liu ◽  
Shiji Song ◽  
Ying Qiao ◽  
Han Zhao
Keyword(s):  
Supply Chain ◽  
Loss Aversion ◽  
Value At Risk ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Conditional Value At Risk ◽  
Optimal Order ◽  
Confidence Levels ◽  
Quantity Flexibility ◽  
Quantity Flexibility Contract

This paper studies the supply chain coordination where the retailer is loss-averse, and a combined buyback and quantity flexibility contract is introduced. The loss-averse retailer’s objective is to maximize the Conditional Value-at-Risk of utility. It is shown the combined contract can coordinate the chain and a unique coordinating wholesale price exists if the confidence level is below a threshold. Moreover, the retailer’s optimal order quantity, expected utility and coordinating wholesale price are decreasing in loss aversion and confidence levels, respectively. We also find that when the contract parameters are restricted, the combined contract may coordinate the supply chain even though neither of its component contracts coordinate the chain.

scholarly journals The More Supply Chain Control Power, the Better? A Comparison among Four Kinds of Cooperation Models

2015 ◽  
Vol 2015 ◽  
pp. 1-19 ◽  
Author(s):  
Weihua Liu ◽  
Shuqing Wang ◽  
Donglei Zhu
Keyword(s):  
Decision Making ◽  
Supply Chain ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
The Other ◽  
Order Quantity ◽  
Control Power ◽  
Decentralized Decision Making ◽  
Optimal Value ◽  
Total Profit

This paper introduces the parameter of supply chain control power into existing supply chain coordination models and explores the impacts of control power on the profits of manufacturer, retailer, and the overall supply chain under four modes of decision-making, including the decentralized decision-making dominated by manufacturer, the decentralized decision-making dominated by retailer, centralized decision-making, and Nash negotiation decision-making. Some significant conclusions are obtained. Firstly, supply chain control power does have great impact on the supply chain profits. The profit of the whole supply chain with centralized decision-making is higher than those of the other three modes, while the overall profit of supply chain with decentralized decision-making is superior to the profit when retailer and manufacturer dominate the supply chain together. Secondly, with decentralized decision-making, for manufacturer and retailer, it is beneficial to gain the control powers of the supply chain; however, control power has an optimal value, not the bigger, the better. Thirdly, under certain circumstances, order quantity will increase and the wholesale price will decrease when control power is transferred from manufacturer to retailer. In this case, the total profit of supply chain dominated by retailer will be greater than that dominated by manufacturer.

scholarly journals Research on the Fresh Agricultural Product Supply Chain Coordination with Supply Disruptions

2013 ◽  
Vol 2013 ◽  
pp. 1-9 ◽  
Author(s):  
Sun Guohua
Keyword(s):  
Supply Chain ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Planning Horizon ◽  
Optimal Order ◽  
Agricultural Product ◽  
Supply Disruptions ◽  
Decentralized Supply Chain ◽  
Lump Sum ◽  
Coordination Contract

This paper develops a dynamic model in a one-supplier-one-retailer fresh agricultural product supply chain that experiences supply disruptions during the planning horizon. The optimal solutions in the centralized and decentralized supply chains are studied. It is found that the retailer’s optimal order quantity and the maximum total supply chain profit in the decentralized supply chain with wholesale price contract are less than that in the centralized supply chain. A two-part tariff contract is proposed to coordinate the decentralized supply chain with which the maximum profit can be achieved. It is found that the optimal wholesale price should be a decreasing piecewise function of the final output. To ensure that the supplier and the retailer both have incentives to accept the coordination contract, a lump-sum fee is offered. The interval of lump-sum fee is given leaving both the supplier and the retailer better off with the two-part tariff contract.

Supply Chain Coordination under Asymmetric Disruptive Demand

2010 ◽  
Vol 44-47 ◽  
pp. 96-100
Author(s):  
Chuan Bo Zhu
Keyword(s):  
Supply Chain ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Decentralized Supply Chain ◽  
Optimal Capacity ◽  
Capacity Reservation ◽  
Chain Operation ◽  
Baseline Case ◽  
Supply Chain Operation ◽  
Better Than

Under the circumstance of disruptive demand, the decision-making and coordination of enterprise’s capacity is directly related to the efficiency of supply chain operation. On the basis of the baseline case, capacity reservation contract sees that the performance of decentralized supply chain is equal to the centralized supply chain, and better than the level of the optimal supply chain capacity under the wholesale price contract. For disruptive demand, this paper discusses the conditions of capacity expansion and supply chain coordination through the capacity reservation contract in two cases, i.e., symmetric disruptive information, asymmetric disruptive information, and compares the optimal capacity and the corresponding profit.

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