IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v45y1999i5p633-640.html
   My bibliography  Save this article

Decentralized Multi-Echelon Supply Chains: Incentives and Information

Author

Listed:
  • Hau Lee

    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Seungjin Whang

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

Consider a supply chain in which a product must pass through multiple sites located in series before it is finally delivered to outside customers. Incentive problems may arise in this system when decisions are delegated to corresponding site managers, each maximizing his/her own performance metric. From the overall system's point of view, the decentralized supply chain may not be as efficient as the centralized one. In practice, alternative performance mechanisms are often used to align the incentives of the different managers in a supply chain. This paper discusses the cost conservation, incentive compatibility, and informational decentralizability properties of these mechanisms. In particular, for a special type of supply chain, we show that a performance measurement scheme involving transfer pricing, consignment, shortage reimbursement, and an additional backlog penalty at the last downstream site satisfies all these properties.

Suggested Citation

  • Hau Lee & Seungjin Whang, 1999. "Decentralized Multi-Echelon Supply Chains: Incentives and Information," Management Science, INFORMS, vol. 45(5), pages 633-640, May.
    • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:5:p:633-640
    DOI: 10.1287/mnsc.45.5.633
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.45.5.633
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.45.5.633?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    2. James P. Monahan, 1984. "A Quantity Discount Pricing Model to Increase Vendor Profits," Management Science, INFORMS, vol. 30(6), pages 720-726, June.
    3. Groves, Theodore & Loeb, Martin, 1975. "Incentives and public inputs," Journal of Public Economics, Elsevier, vol. 4(3), pages 211-226, August.
    4. Michael H. Riordan, 1984. "Uncertainty, Asymmetric Information and Bilateral Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 83-93.
    5. Hau L. Lee & Meir J. Rosenblatt, 1986. "A Generalized Quantity Discount Pricing Model to Increase Supplier's Profits," Management Science, INFORMS, vol. 32(9), pages 1177-1185, September.
    6. Russell L. Ackoff, 1967. "Management Misinformation Systems," Management Science, INFORMS, vol. 14(4), pages 147-156, December.
    7. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Amiya K. Basu & Rajiv Lal & V. Srinivasan & Richard Staelin, 1985. "Salesforce Compensation Plans: An Agency Theoretic Perspective," Marketing Science, INFORMS, vol. 4(4), pages 267-291.
    10. HOLMSTROM, Bengt, 1979. "Moral hazard and observability," LIDAM Reprints CORE 379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Andrew J. Clark & Herbert Scarf, 2004. "Optimal Policies for a Multi-Echelon Inventory Problem," Management Science, INFORMS, vol. 50(12_supple), pages 1782-1790, December.
    12. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    13. Maqbool Dada & K. N. Srikanth, 1987. "Pricing Policies for Quantity Discounts," Management Science, INFORMS, vol. 33(10), pages 1247-1252, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charles J. Corbett, 2001. "Stochastic Inventory Systems in a Supply Chain with Asymmetric Information: Cycle Stocks, Safety Stocks, and Consignment Stock," Operations Research, INFORMS, vol. 49(4), pages 487-500, August.
    2. Onjewu, Adah-Kole Emmanuel & Walton, Nigel & Koliousis, Ioannis, 2023. "Blockchain agency theory," Technological Forecasting and Social Change, Elsevier, vol. 191(C).
    3. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    4. Arzum Akkaş & Nachiketa Sahoo, 2020. "Reducing Product Expiration by Aligning Salesforce Incentives: A Data‐driven Approach," Production and Operations Management, Production and Operations Management Society, vol. 29(8), pages 1992-2009, August.
    5. Goldman, Eitan & Slezak, Steve L., 2006. "An equilibrium model of incentive contracts in the presence of information manipulation," Journal of Financial Economics, Elsevier, vol. 80(3), pages 603-626, June.
    6. Hilmer, Michael, 2013. "Fiscal treatment of managerial compensation - a welfare analysis," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79703, Verein für Socialpolitik / German Economic Association.
    7. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    8. Henry Tosi, 2008. "Quo Vadis? Suggestions for future corporate governance research," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 12(2), pages 153-169, May.
    9. de La Bruslerie, H. & Deffains-Crapsky, C., 2008. "Information asymmetry, contract design and process of negotiation: The stock options awarding case," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 73-91, April.
    10. Sanford J. Grossman & Oliver D. Hart, 1982. "Corporate Financial Structure and Managerial Incentives," NBER Chapters, in: The Economics of Information and Uncertainty, pages 107-140, National Bureau of Economic Research, Inc.
    11. Chaney, Paul K. & Thakor, Anjan V., 1985. "Incentive effects of benevolent intervention : The case of government loan guarantees," Journal of Public Economics, Elsevier, vol. 26(2), pages 169-189, March.
    12. Amin H. Amershi & Peter Cheng, 1988. "Implementable equilibria in accounting contexts: An exploratory study," Contemporary Accounting Research, John Wiley & Sons, vol. 4(2), pages 515-563, March.
    13. Naresh Bansal & Kissan Bansal & Minghui Ma & M. Babajide Wintoki, 2017. "Do CMO Incentives Matter? An Empirical Investigation of CMO Compensation and Its Impact on Firm Performance," Management Science, INFORMS, vol. 63(6), pages 1993-2015, June.
    14. Fu, Yishu, 2019. "The value of corporate governance: Evidence from the Chinese anti-corruption campaign," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 461-476.
    15. Innes, Robert, 1986. "Moral Hazard and the Genesis of Farm Debt," CUDARE Working Papers 198349, University of California, Berkeley, Department of Agricultural and Resource Economics.
    16. Ricardo Ernst & Jose Ignacio López-Sánchez & David Urbano, 2009. "A Negotiation Model for Inducing Higher Service in a Distribution Channel," Group Decision and Negotiation, Springer, vol. 18(5), pages 499-517, September.
    17. Ili, Dragan & Pisarov, Sonja & Schmidt, Peter S., 2015. "Preaching Water But Drinking Wine? Relative Performance Evaluation in International Banking," Working papers 2015/10, Faculty of Business and Economics - University of Basel.
    18. Li, Xiuhui & Wang, Qinan, 2007. "Coordination mechanisms of supply chain systems," European Journal of Operational Research, Elsevier, vol. 179(1), pages 1-16, May.
    19. Lőrinczi, Gyula, 2013. "A cégek eredete [The origin of the firm]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 25-46.
    20. Sascha Desmettre & Alexander Szimayer, 2011. "Work effort, consumption, and portfolio selection: when the occupational choice matters," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 74(1), pages 121-145, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:45:y:1999:i:5:p:633-640. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.