Coordinating a decentralized supply chain with a stochastic demand using quantity flexibility contract: a game-theoretic approach

Abstract

Supply chain includes two or more parties linked by flow of goods, information, and funds. In a decentralized system, supply chain members make decision regardless of their decision's effects on the performance of the other members and the entire supply chain. This is the key issue in supply chain management, that the mechanism should be developed in which different objectives should be aligned, and integrate their activities to optimize the entire system. Therefore, a coordination mechanism could be necessary to motivate members to achieve coordination. The contracts help the supply chain members to achieve coordination that will lead to improved supply chain performance. This paper analyzes a quantity-flexibility (QF) contract. The objective of this paper is to explore the applicability and benefits of the contracts, so to realize the importance of coordination by contracts, two cases have been studied. The first case is "no coordination" and the other case is "coordination with QF contract". Utilizing differential game theory, this paper formulates the optimal decisions of the supplier and the retailer in two different game scenarios: Nash equilibrium and cooperative game.It is expected that by designing the contracts as per the requirements of the supply chain members as well as the whole supply chain, supply chain performance can be improved.