A Decentralized Supply Chain Essay -- Business, Optimal Supply Chain

A decentralized supply chain Is one where each supply chain entity – manufacturer, retailer, intermediary, is free to make it's own operational decisions. However, these decisions need not necessarily all be in the best interest of the entire supply chain, but rather are usually taken keeping in mind the best interests of just the individual entity. a) Recent Literature on supply chain co-ordination with contracts Optimal supply chain performance requires the execution of a precise set of actions that are not always in the interest of the individual supply chain members, who are most often interested in only optimizing their own objectives (Cachon et al. (2003)). Optimal supply chain performance can be achieved if firms coordinate by contracting on a set of transfer payments that are design to align each firm's objective to the supply chain objective. This mechanism is termed decentralized supply chain co-ordination using contracts. In the following, we review some of the important contracts found in recent supply chain literature, the significant assumptions made while deriving the different contract types, the practical use and limitations of each type of contract. Through this section, we aim to develop an essential vocabulary of the state of the art in supply chain contracts and to use this knowledge to develop optimal, coordinating contractual structures for the problems in this dissertation.( Cachon et al. (2003)). Wholesale price contract: With a wholesale price contract, the supplier charges the retailer a fixed price w per-unit of product purchased. Lariviere and Porteus (2001) analyze a wholesale price contract in the context of the news-vendor model. They consider a manufacturer producing a single good at a mar... ...ize the probability of achieving a certain target. They obtain contracts based on the pareto optimality criterion, which is again different from the Nash Equilibrium criterion usually used to derive optimal contract parameters. The authors setup a definition of a pareto contract as : â€Å"Within a contractual form, a contract is said to be Pareto if its parameter set is Pareto, that is, there does not exist an alternative parameter set such that no agent is worse off and at least one agent is strictly better off.† They also note that Pareto contracts do not co-ordinate a supply chain, because there is one agent that is always strictly better off than other agents and for a contract to co-ordinate a supply chain, we need that the optimal actions of the agents under the contract lead to pareto optimality for the supply chain, as a whole, and not any individual agent.