Supply Chain Coordination with Contracts

Today I would like to talk about Supply Chain Coordination with Contracts, a chapter written by Cachon (2003). It has become the standard reference when it comes to teaching some key supply chain models. Coordination between the members of a supply chain is certainly very relevant but also challenging. Because the members of a supply chain are typically concerned with optimizing their own objectives, their actions might not lead to optimal supply chain performance. Therefore, contracts need to be carefully designed. The author “reviews and extends the supply chain literature on the management of incentive conflicts with contracts”. For example, Cachon presents key supply chain models, hereby extending the newsvendor model “by allowing the retailer to choose the retail price in addition to the stocking quantity” and “by allowing the retailer to exert costly effort to increase demand”. Teaching such models can help students to gain the required problem-solving competencies and abstraction capabilities that are needed in today’s business world.

Cachon, G.P. (2003). Supply Chain Coordination with Contracts. Handbooks in Operations Research and Management Science, 11 (Supply Chain Management: Design, Coordination and Operation), 227-339 https://doi.org/10.1016/S0927-0507(03)11006-7