Annals of Operations Research

, Volume 226, Issue 1, pp 277–300 | Cite as

A multiscale decision theory analysis for revenue sharing in three-stage supply chains

Article

Abstract

Revenue sharing is an effective mechanism for coordinating decisions in a supply chain. For a three-stage supply chain, we explore how revenue-based incentives can be used by the stage 1 supply chain agent (retailer) to motivate cooperative behavior from its two upstream partners with conflicting interests. To illustrate our analysis, we provide a food supply chain example, with retailer, processor and farmer. Compared to the frequently studied two-stage problem, a three-stage supply chain leads to a more complex decision and incentive problem. To model and solve this more complex problem, we apply multiscale decision theory (MSDT), a novel approach for multi-level system analysis. MSDT enables us to account for uncertainties at all stages of the supply chain, not just at the final stage, and to derive analytic solutions. Results show and quantify the extent to which contracting and information sharing facilitate chain-wide cooperation. Further, it determines optimal decisions and incentives for agents at each stage. This paper is the first to apply MSDT to supply chains and contributes to its theory by advancing MSDT modeling and analysis capabilities. The modeling and solution approach can be applied to decision and inventive problems in other multi-level enterprise systems.

Keywords

Multiscale decision theory Supply chain contracts and incentives  Revenue sharing Game theory 

References

  1. Anupindi, R., & Bassok, Y. (1999). Supply contracts with quantity commitments and stochastic demand. Quantitative Models for Supply Chain Management, 19, 197–232.Google Scholar
  2. Atkinson, A. A. (1979). Incentives, uncertainty, and risk In th newsboy problem. Decision Sciences, 10(3), 341–357. doi:10.1111/j.1540-5915.1979.tb00030.x.CrossRefGoogle Scholar
  3. Barnard, C. I. (1971). The functions of the executive (30th Anniversary) (Edition ed.). Cambridge: Harvard University Press.Google Scholar
  4. Bernstein, F., & Federgruen, A. (2005). Decentralized supply chains with competing retailers under demand uncertainty. Management Science, 18–29.Google Scholar
  5. Cachon, G. P., & Lariviere, M. A. (2005). Supply chain coordination with revenue-sharing contracts: Strengths and limitations. Management Science, 51(1), 30–44.CrossRefGoogle Scholar
  6. Chang, H. S., Fard, P. J., Marcus, S. I., & Shayman, M. (2003). Multitime scale Markov decision processes. IEEE Transactions on Automatic Control, 48(6), 976–987.CrossRefGoogle Scholar
  7. Dana, J. D, Jr, & Spier, K. E. (2001). Revenue sharing and vertical control in the video rental industry. The Journal of Industrial Economics, 49(3), 223–245.CrossRefGoogle Scholar
  8. Dolgov, D., & Durfee, E. (2004). Graphical models in local, asymmetric multi-agent Markov decision processes. Proceedings of the Third International Joint Conference on Autonomous Agents and Multiagent Systems-Volume, 2, 956–963.Google Scholar
  9. Filar, J. A., & Vrieze, K. (1996). Competitive Markov decision processes. New York: Springer.CrossRefGoogle Scholar
  10. Fugate, B., Sahin, F., & Mentzer, J. T. (2006). Supply chain management coordination mechanisms. Journal of Business Logistics, 27(2), 129–161.CrossRefGoogle Scholar
  11. Giannoccaro, I., & Pontrandolfo, P. (2004). Supply chain coordination by revenue sharing contracts. International Journal of Production Economics, 89(2), 131–139.CrossRefGoogle Scholar
  12. Henry, A., & Wernz, C. (2010). Optimal incentives in three-level agent systems. In Proceedings of the 2010 Industrial Engineering Research Conference, Cancun, Mexico, pp. 1–6.Google Scholar
  13. Holmstrom, B., & Milgrom, P. (1991). Multitask principal–agent analyses: Incentive contracts, asset ownership, and job design. Journal of Law, Economics, and Organization, 7, 24–52.CrossRefGoogle Scholar
  14. Huang, Y., Huang, G. Q., & Newman, S. T. (2011). Coordinating pricing and inventory decisions in a multi-level supply chain: A game-theoretic approach. Transportation Research Part E: Logistics and Transportation Review, 47(2), 115–129.CrossRefGoogle Scholar
  15. Itoh, H. (1992). Cooperation in hierarchical organizations: An incentive perspective. Journal of Law, Economics, and Organization, 8(2), 321.Google Scholar
  16. Jacobson, M., Shimkin, N., & Shwartz, A. (2003). Markov decision processes with slow scale periodic decisions. Mathematics of Operations Research, 28(4), 777–800.CrossRefGoogle Scholar
  17. Koulamas, C. (2006). A newsvendor problem with revenue sharing and channel coordination. Decision Sciences, 37(1), 91–100. doi:10.1111/j.1540-5414.2006.00111.x.CrossRefGoogle Scholar
  18. Leng, M., & Zhu, A. (2009). Side-payment contracts in two-person nonzero-sum supply chain games: Review, discussion and applications. European Journal of Operational Research, 196(2), 600–618.CrossRefGoogle Scholar
  19. Macho Stadler, I., & Pérez Castrillo, J. D. (1998). Centralized and decentralized contracts in a moral hazard environment. The Journal of Industrial Economics, 46(4), 489–510.Google Scholar
  20. Melumad, N. D., Mookherjee, D., & Reichelstein, S. (1995). Hierarchical decentralization of incentive contracts. The RAND Journal of Economics, 26(4), 654–672.Google Scholar
  21. Mesarovic, M. D., Macko, D., & Takahara, Y. (1970). Theory of hierarchical, multilevel, systems. New York: Academic Press.Google Scholar
  22. Munson, C. L., & Rosenblatt, M. J. (2001). Coordinating a three-level supply chain with quantity discounts. IIE Transactions, 33(5), 371–384.Google Scholar
  23. Pasternack, B. A. (1985). Optimal pricing and return policies for perishable commodities. Marketing Science, 4(2), 166–176.CrossRefGoogle Scholar
  24. Pasternack, B. A. (2001). The capacitated newsboy problem with revenue sharing. Journal of Applied Mathematics and Decision Sciences, 5(1), 21–33.CrossRefGoogle Scholar
  25. Pathak, S. D., Day, J. M., Nair, A., Sawaya, W. J., & Kristal, M. M. (2007). Complexity and adaptivity in supply networks: Building supply network theory using a complex adaptive systems perspective. Decision Sciences, 38(4), 547–580.CrossRefGoogle Scholar
  26. Sahin, F., & Robinson, E. P. (2002). Flow coordination and information sharing in supply chains: Review, implications, and directions for future research. Decision Sciences, 33(4), 505–536.CrossRefGoogle Scholar
  27. Sahin, F., & Robinson, E. P. (2005). Information sharing and coordination in make-to-order supply chains. Journal of Operations Management, 23(6), 579–598.CrossRefGoogle Scholar
  28. Schneeweiss, C. (2003). Distributed decision making. Berlin: Springer.CrossRefGoogle Scholar
  29. Swaminathan, J. M., Smith, S. F., & Sadeh, N. M. (1998). Modeling supply chain dynamics: A multiagent approach. Decision Sciences, 29(3), 607–632.CrossRefGoogle Scholar
  30. Taylor, T. A. (2002). Supply chain coordination under channel rebates with sales effort effects. Management Science, 48(8), 992–1007.CrossRefGoogle Scholar
  31. Timmer, J. B. (2004). The effects of win–win conditions on revenue-sharing contracts. Enschede: University of Twente.Google Scholar
  32. Tsay, A. A., & Lovejoy, W. S. (1999). Quantity flexibility contracts and supply chain performance. Manufacturing and Service Operations Management, 1(2), 89–111.CrossRefGoogle Scholar
  33. Van der Zee, D., & Van der Vorst, J. (2005). A modeling framework for supply chain simulation: Opportunities for improved decision making. Decision Sciences, 36(1), 65–95.CrossRefGoogle Scholar
  34. Wernz, C. (2008). Multiscale decision making: Bridging temporal and organizational scales in hierarchical systems. Dissertation, University of Massachusetts Amherst.Google Scholar
  35. Wernz, C. (2013). Multi-time-scale Markov decision processes for organizational decision-making. EURO Journal on Decision Processes, 1(3), 299–324.CrossRefGoogle Scholar
  36. Wernz, C., & Deshmukh, A. (2007a). Decision strategies and design of agent interactions in hierarchical manufacturing systems. Journal of Manufacturing systems, 26(2), 135–143.CrossRefGoogle Scholar
  37. Wernz, C., & Deshmukh, A. (2007b) Managing hierarchies in a flat world. In Proceedings of the 2007 Industrial Engineering Research Conference, Nashville, TN, pp. 1266–1271.Google Scholar
  38. Wernz, C., & Deshmukh, A. (2009). An incentive-based, multi-period decision model for hierarchical systems. In Proceedings of the 3rd Annual Conference of the Indian Subcontinent Decision Sciences Institute Region (ISDSI), Hyderabad, India.Google Scholar
  39. Wernz, C., & Deshmukh, A. (2010a). Multi-time-scale decision making for strategic agent interactions. In Proceedings of the 2010 Industrial Engineering Research Conference, Cancun, Mexico, pp. 1–6.Google Scholar
  40. Wernz, C., & Deshmukh, A. (2010b). Multiscale decision-making: Bridging organizational scales in systems with distributed decision-makers. European Journal of Operational Research, 202(3), 828–840.Google Scholar
  41. Wernz, C., & Deshmukh, A. (2012). Unifying temporal and organizational scales in multiscale decision-making. European Journal of Operational Research, 223(3), 739–751.CrossRefGoogle Scholar
  42. Wernz, C., & Henry, A. (2009). Multilevel coordination and decision-making in service operations. Service Science, 1(4), 270–283.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Grado Department of Industrial and Systems EngineeringVirginia TechBlacksburgUSA

Personalised recommendations