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Contracting mechanism with imperfect information in a two-level supply chain

Author

Listed:
  • Asif Muzaffar

    (University of Central Punjab)

  • Shiming Deng

    (Huazhong University of Science and Technology)

  • Muhammad Nasir Malik

    (University of Central Punjab)

Abstract

This article investigates a two-level supply chain consisting of a single manufacturer and a retailer. The retailer’s ordering patterns are highly influenced by his risk preferences. We discuss ordering policies when the manufacturer has limited demand information and propose a production-commitment contract, which mitigates double marginalization under imperfect information. Demand distribution is private information of the retailer and the manufacturer only assumes an educated guess about the mean and variance. Production-commitment contract is an attractive option for make-to-stock scenarios where quantity is confirmed after the demand is realized. We show that lack of information may not have an adverse effect. We also prove analytically that informational advantage may not necessarily be a supply chain advantage and also provide numerical insights for a win-win situation.

Suggested Citation

  • Asif Muzaffar & Shiming Deng & Muhammad Nasir Malik, 2020. "Contracting mechanism with imperfect information in a two-level supply chain," Operational Research, Springer, vol. 20(1), pages 349-368, March.
    • Handle: RePEc:spr:operea:v:20:y:2020:i:1:d:10.1007_s12351-017-0327-4
    DOI: 10.1007/s12351-017-0327-4
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    References listed on IDEAS

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