Decentralized Multi-Echelon Supply Chains: Incentives and Information

• DOI: 10.1287/mnsc.45.5.633
• Publication Date: 2008-11-08T14:58:02Z
• Authors: Hau Lee; Seungjin Whang
• Keywords: Consignment; Economic shortage; Incentive compatibility

Consider a supply chain in which product must pass through multiple sites located series before it is finally delivered to outside customers. Incentive problems may arise this system when decisions are delegated corresponding site managers, each maximizing his/her own performance metric. From the overall system's point of view, decentralized not be as efficient centralized one. In practice, alternative mechanisms often used align incentives different managers chain. This paper discusses cost conservation, incentive compatibility, and informational decentralizability properties these mechanisms. particular, for special type chain, we show that measurement scheme involving transfer pricing, consignment, shortage reimbursement, an additional backlog penalty at last downstream satisfies all properties.