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Supply Chain coordination by contracts underbinomial production yield

Author

Listed:
  • Josephine Clemens

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Karl Inderfurth

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract
Supply chain coordination is enabled by adequately designed contracts so that decision making by multiple actors avoids efficiency losses in the supply chain. From literature it is known that in newsvendor type settings with random demand and deterministic supply the activities in supply chains can be coordinated by sophisticated contracts while the simple wholesale price contract fails to achieve coordination due to the double marginalization effect. Advanced contracts are typically characterized by risk sharing mechanisms between the actors, which have the potential to coordinate the supply chain. Regarding the opposite setting with random supply and deterministic demand, literature offers a considerably smaller spectrum of solution schemes. While contract types for the well-known stochastically proportional yield have been analyzed under different settings, other yield distributions have not received much attention in literature so far. However, practice shows that yield distributions strongly depend on the industry and the production process that is considered. This paper analyzes a buyer-supplier supply chain in a random yield, deterministic demand setting. It is shown how under binomially distributed yields risk sharing contracts can be used to coordinate buyer’s ordering and supplier’s production decision. Both parties are exposed to risks of overproduction and under-delivery. In contrast to settings with stochastically proportional yield, however, the impact of yield uncertainty can be quite different in the binomial yield case. Under binomial yield, the output uncertainty decreases with larger production quantities while it is independent from lot sizes under stochastically proportional yield. Consequently, the results from previous contract analyses on other yield types may not hold any longer. The current study reveals that, like under stochastically proportional yield, coordination is impeded by double marginalization if a simple wholesale price contract is applied. However, more sophisticated contracts which penalize or reward the supplier can change the risk distribution so that supply chain coordination is possible under binomial yield. Thus, even though risk diminishes with larger lot sizes, the supply chain benefits from advanced risk sharing contracts because they trigger coordinated behavior.

Suggested Citation

  • Josephine Clemens & Karl Inderfurth, 2014. "Supply Chain coordination by contracts underbinomial production yield," FEMM Working Papers 140011, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    • Handle: RePEc:mag:wpaper:140011
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    Citations

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    Cited by:

    1. He, Yuanjie, 2015. "Acquisition pricing and remanufacturing decisions in a closed-loop supply chain," International Journal of Production Economics, Elsevier, vol. 163(C), pages 48-60.
    2. Talay, Işılay & Özdemir-Akyıldırım, Öznur, 2019. "Optimal procurement and production planning for multi-product multi-stage production under yield uncertainty," European Journal of Operational Research, Elsevier, vol. 275(2), pages 536-551.
    3. Sarah Parlane & Ying-Yi Tsai, 2017. "Optimal Management of Supply Disruptions when Contracting with Unreliable, Risk-averse, Suppliers," Working Papers 201714, School of Economics, University College Dublin.
    4. LIN, Feng & QIN, Xibei & PU, Xujin & ZHU, Weiwei & ZHUO, Xingxuan, 2021. "Effects of in-house production on channel structures in a co-opetitive supply chain under supply uncertainty," Omega, Elsevier, vol. 103(C).
    5. Karl Inderfurth, 2015. "Safety Stocks in Centralized and Decentralized Supply Chains under Different Types of Random Yields," FEMM Working Papers 150007, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    6. Anderson, Edward & Monjardino, Marta, 2019. "Contract design in agriculture supply chains with random yield," European Journal of Operational Research, Elsevier, vol. 277(3), pages 1072-1082.
    7. Yadavalli, Venkata SS & Darbari, Jyoti Dhingra & Bhayana, Nidhi & Jha, P.C. & Agarwal, Vernika, 2019. "An integrated optimization model for selection of sustainable suppliers based on customers’ expectations," Operations Research Perspectives, Elsevier, vol. 6(C).
    8. Peng, Yang & Yan, Xiaoming & Jiang, Yujie & Ji, Min & Cheng, T.C.E., 2021. "Competition and coordination for supply chain networks with random yields," International Journal of Production Economics, Elsevier, vol. 239(C).
    9. Asl-Najafi, Javad & Yaghoubi, Saeed & Zand, Fatemeh, 2021. "Dual-channel supply chain coordination considering targeted capacity allocation under uncertainty," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 187(C), pages 566-585.
    10. Adhikari, Arnab & Bisi, Arnab & Avittathur, Balram, 2020. "Coordination mechanism, risk sharing, and risk aversion in a five-level textile supply chain under demand and supply uncertainty," European Journal of Operational Research, Elsevier, vol. 282(1), pages 93-107.
    11. Yuan, Xiaoyong & Bi, Gongbing & Fei, Yalei & Liu, Lindong, 2021. "Supply chain with random yield and financing," Omega, Elsevier, vol. 102(C).
    12. Yin, Zhe & Ma, Shihua, 2015. "Incentives to improve the service level in a random yield supply chain: The role of bonus contracts," European Journal of Operational Research, Elsevier, vol. 244(3), pages 778-791.
    13. Bo He & Guo Li & Mengqi Liu, 2018. "Impacts of decision sequences on a random yield supply chain with a service level requirement," Annals of Operations Research, Springer, vol. 268(1), pages 469-495, September.
    14. Chongfeng Lan & Zhongzhen Miao & Huanyong Ji, 2021. "Strategic Analysis of Dual-Channel Green Supply Chain with an Unreliable and Competitive Supplier," Sustainability, MDPI, vol. 13(10), pages 1-22, May.
    15. Jiarong Luo & Xu Chen, 2017. "Risk hedging via option contracts in a random yield supply chain," Annals of Operations Research, Springer, vol. 257(1), pages 697-719, October.
    16. Jiarong Luo & Xu Chen & Chong Wang & Gaoxun Zhang, 2021. "Bidirectional options in random yield supply chains with demand and spot price uncertainty," Annals of Operations Research, Springer, vol. 302(1), pages 211-230, July.

    More about this item

    Keywords

    Supply chain coordination; contracts; binomial yield; risk sharing;
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