A New Revenue Sharing Mechanism forCoordinating Multi-echelon Supply Chains
Rhee, Bo van der
Veen, Jack A.A. van der
Reddy, Vijayender Nalla
One of the key issues in Supply Chain Management is to prevent sub-optimization caused by the distribution of decision power over the various entities. Over the last decade, various contract mechanisms such as Revenue Sharing (RS) have been used to overcome such difficulties. Typically, a contract mechanism is negotiated between two supply chain entities. In this paper a new type of RS contract mechanism for multi-echelon supply chains is introduced. Instead of multiple pairwise RS contracts between adjacent entities, the so-called spanning RS contract mechanism between the most downstream entity and all upstream entities is proposed. The new RS contract is applied in a setting of a linear supply chain facing stochastic demand in which each entity can set its own wholesale price, except for the most downstream entity that faces the market price but can decide the order size. It is argued that from an implementation perspective the spanning contract mechanism is superior to the pairwise contracts. Furthermore, it is shown that in the setting studied, the spanning RS mechanism can maximize the supply chain profits (coordination) and provide opportunities for all entities to improve their profits (win-win). Also, two special cases of distributing the additional profits are shown and a numerical example is provided.
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