Supply Chain Coordination with Separating and Pooling Contracts

Supply chains typically consist of separate, individual members making decisions autonomously based on their own local objectives. Such opportunistic and locally optimal decisions can disadvantage another member or even the entire supply chain. This dissertation focuses on the design of effective and easy-to-implement coordination contracts to align the chain members’ decisions and overcome inefficiencies associated with decentralized supply chains. Coordination contracts, in this dissertation, are designed for a two-echelon supply chain consisting of a single supplier (she) serving a retailer (he) with a single product. The retailer has private information about customer demand and cost parameters on his side, and the supplier relies on the retailer's market reach to maintain her sales volume. To persuade the strong retailer to deviate from his optimal procurement plan, the supplier makes take-it-or-leave-it offers to the retailer in the form of menus of contracts, each consisting of a procurement plan plus a side payment. In designing coordination contracts, we drop restrictive assumptions in the literature and incorporate a new design factor—complexity of menu—to reflect the behavior of real-world decision-makers. Considering three different settings, we design menus with two types of contracts: separating (a contract is tailored to each type) and pooling (a contract is intended to appeal to multiple types). We present formulations, intuitive network interpretations for incentive constraints, and practical contract designs along with numerical evidence of their efficacy in improving supply chain performance. The results and insights in this dissertation can provide guidelines for designing coordination contracts in real-world settings.