Contracting mechanism with imperfect information in a two-level supply chain

Asif Muzaffar (), Shiming Deng () and Muhammad Nasir Malik ()
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Asif Muzaffar: University of Central Punjab
Shiming Deng: Huazhong University of Science and Technology
Muhammad Nasir Malik: University of Central Punjab

Operational Research, 2020, vol. 20, issue 1, No 14, 349-368

Abstract: Abstract This article investigates a two-level supply chain consisting of a single manufacturer and a retailer. The retailer’s ordering patterns are highly influenced by his risk preferences. We discuss ordering policies when the manufacturer has limited demand information and propose a production-commitment contract, which mitigates double marginalization under imperfect information. Demand distribution is private information of the retailer and the manufacturer only assumes an educated guess about the mean and variance. Production-commitment contract is an attractive option for make-to-stock scenarios where quantity is confirmed after the demand is realized. We show that lack of information may not have an adverse effect. We also prove analytically that informational advantage may not necessarily be a supply chain advantage and also provide numerical insights for a win-win situation.

Keywords: Risk preferences; Newsboy problem; Production-commitment contract; Asymmetric information (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s12351-017-0327-4

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