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Pareto-optimal contracts for a supply chain with satisficing objectives

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  • C Shi

    (Washington State University)

  • B Chen

    (Washington State University)

Abstract

We analyse a decentralized supply chain consisting of a supplier and a retailer, each with a satisficing objective, that is, to maximize the probability of achieving a predetermined target profit. The supply chain is examined under two types of commonly used contracts: linear tariff contracts (including wholesale price contracts as special cases) and buy-back contracts. First, we identify the Pareto-optimal contract(s) for each contractual form. In particular, it is shown that there is a unique wholesale price that is Pareto optimal for both contractual types. Second, we evaluate the performance of the Pareto-optimal contracts. In contrast to the well-known results for a supply chain with the traditional expected profit objectives, we show that wholesale price contracts can coordinate the supply chain whereas buy-back contracts cannot. This provides an additional justification for the popularity of wholesale price contracts besides their simplicities and lower administration costs.

Suggested Citation

  • C Shi & B Chen, 2007. "Pareto-optimal contracts for a supply chain with satisficing objectives," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(6), pages 751-759, June.
    • Handle: RePEc:pal:jorsoc:v:58:y:2007:i:6:d:10.1057_palgrave.jors.2602186
    DOI: 10.1057/palgrave.jors.2602186
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    References listed on IDEAS

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    Cited by:

    1. Yang, Shilei & Shi, Chunming Victor & Zhao, Xuan, 2011. "Optimal ordering and pricing decisions for a target oriented newsvendor," Omega, Elsevier, vol. 39(1), pages 110-115, January.
    2. J-M Chen & H-L Cheng & I-C Lin, 2011. "On channel coordination under price-dependent revenue-sharing: can eBay's fee structure coordinate the channel?," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(11), pages 1992-2001, November.
    3. He, Xiuli & Khouja, Moutaz, 2011. "Pareto analysis of supply chain contracts under satisficing objectives," European Journal of Operational Research, Elsevier, vol. 214(1), pages 53-66, October.
    4. Arcelus, F.J. & Kumar, Satyendra & Srinivasan, G., 2012. "Risk tolerance and a retailer's pricing and ordering policies within a newsvendor framework," Omega, Elsevier, vol. 40(2), pages 188-198, April.
    5. Pinto, Roberto, 2016. "Stock rationing under a profit satisficing objective," Omega, Elsevier, vol. 65(C), pages 55-68.
    6. Shi, Chunming (Victor) & Yang, Shilei & Xia, Yu & Zhao, Xuan, 2011. "Inventory competition for newsvendors under the objective of profit satisficing," European Journal of Operational Research, Elsevier, vol. 215(2), pages 367-373, December.
    7. Jammernegg, Werner & Kischka, Peter & Silbermayr, Lena, 2024. "Risk preferences, newsvendor orders and supply chain coordination using the Mean-CVaR model," International Journal of Production Economics, Elsevier, vol. 270(C).
    8. Che-Tsung Tung & Kuo-Hsien Wang & Yu-Je Lee, 2014. "A Model and its Solution Method for a Two-Item Newsvendor Supply Chain with Return Policy and Demand Leakage," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 397-408, January.
    9. Raza, Syed Asif & Rathinam, Sivakumar, 2017. "A risk tolerance analysis for a joint price differentiation and inventory decisions problem with demand leakage effect," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 129-145.
    10. Shi, Chunming Victor & Zhao, Xuan & Xia, Yu, 2010. "The setting of profit targets for target oriented divisions," European Journal of Operational Research, Elsevier, vol. 206(1), pages 86-92, October.
    11. Yang, Shilei & Shi, Chunming (Victor) & Zhang, Yibin & Zhu, Jing, 2014. "Price competition for retailers with profit and revenue targets," International Journal of Production Economics, Elsevier, vol. 154(C), pages 233-242.
    12. Lin, Zhibing & Cai, Chen & Xu, Baoguang, 2010. "Supply chain coordination with insurance contract," European Journal of Operational Research, Elsevier, vol. 205(2), pages 339-345, September.

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