Conclusion and Outlook

Abstract

A number of contracts have been identified that coordinate the supply chain in a newsvendor setting, but it is often observed that non-coordinating contracts or non-optimal contract parameters are chosen in practice. A standard argument is that complex coordinating contracts are more expensive to administer. Thus, one potentially fruitful research direction to understand contract choice better is the quantification of administration costs in practice (Cachon 2003). Another important research area is the refinement of existing models to incorporate important business realities such as long-term relationships. Those may include buyer-supplier networks, the need for renegotiation or the interaction with spot markets. Recent papers on relational contracts have investigated the interaction of formal contracts and relational aspects of an arrangement, suggesting that a relational perspective of buyer-supplier interaction may provide new insights. The model presented in this treatise puts a quantity flexibility contract between two parties in a relational contracting framework.We are able to characterize an optimal relational contract, i.e., to develop policies for supplier and buyer that structure investments in quality and flexibility in a way that no other self-enforcing contract generates higher expected joint surplus. A first observation is that the dynamics introduced by repeated interaction and joint responsibility for quality improvement may change contractually agreed parameters of the quantity flexibility contract. As long as the business relationship is still ongoing and the current quality level is sufficiently high, the buyer will incentivize the supplier to induce effort by informally offering an adaptation of contract parameters, possibly supplemented by an additional transfer payment. Hence, our game-theoretic model confirms the common observation that formal contract parameters are exposed to change, given the scope of the supply chain relationship is long-term.