Profit Allocation, Decision Sequence and Compliance Aspects of Coordinating Contracts: A Retrospect

Meng Lu, Suresh Sethi, Yangyang Xie and Houmin Yan

Production and Operations Management, 2019, vol. 28, issue 5, 1222-1237

Abstract: Coordinating contracts have been extensively researched in supply chain management. In this retrospect, we systematically review the profit allocation, decision sequence, and compliance aspects of these contracts. In addition to the existing concepts in the literature, we propose the notion of sample‐path flexibility in profit allocation. Based on precise mathematical definitions, we develop structural properties and characterize sufficient conditions for flexibility in profit allocation, sequence independence, and voluntary compliance. We also obtain sufficient conditions for coordinating supply chains involving fairness‐preferred or downside‐risk‐averse agents with sample‐path flexible and voluntary compliant contracts. We reveal that sample‐path flexible contracts must have a transaction after uncertainty is realized and that transactions both before and after uncertainty realization adds to their flexibility. With the properties and conditions in hand, we develop a 3 × 3 matrix framework of the coordination aspects within which several well‐studied supply chain contracts can be systematically classified. Furthermore, we provide the steps to design coordinating contracts with sample‐path flexibility and voluntary compliance, along with examples. Our results help in the design, evaluation, and implementation of supply chain coordinating contracts.

Date: 2019
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