A choice-based optimization approach for contracting in supply chains

Nils Roemer, Sven Müller and Guido Voigt

European Journal of Operational Research, 2023, vol. 305, issue 1, 271-286

Abstract: We consider a supplier-buyer supply chain. The buyer holds private forecast information (high/low), and the supplier offers a menu of capacity reservation contracts to align incentives. We analyze how the menu of contracts should be adapted when lifting the assumptions that buyers act rationally and/or that buyers’ utility is deterministic. We employ a novel choice-based optimization approach that integrates a multinomial logit model (capturing the buyer’s contract choice behavior) with a mixed-integer nonlinear program. The choice-based optimization model can be solved with off-the-shelf solvers and is therefore ready to use by management. We further derive qualitative insights on how to adapt existing contracts in a numerical study. We show that cutting off low-demand buyers, reducing reservation fees in a specific manner and introducing more contract options may increase suppliers’ and supply chains’ performance.

Keywords: Behavioral OR; Asymmetric information; Bounded rationality; Choice-based optimization; Supply chain contracts (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:305:y:2023:i:1:p:271-286

DOI: 10.1016/j.ejor.2022.05.052

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