Strategic Behavior in Supply Chains: Information Acquisition

Reducing the financial impact of supply–demand mismatches is a central objective of supply chain management. Modern supply chains have multiple independent self-interested actors each with different information about the demand uncertainties facing the supply chain. Strategic behavior by these self-interested actors often enhances the supply–demand mismatches in the supply chain. In this chapter, we present the case of a fashion products supply chain with multiple strategic actors each of which has different information. Traditional contracting strategies in this supply chain lead to excessive supply–demand mismatches. We then propose an alternate contracting strategy. Specifically, we propose that the supply chain starts offering “Advanced Purchase Discounts” in addition to the traditional wholesale price based contracts. We demonstrate that strategic responses to these contracts by agents in the supply chain lead to better information sharing, superior risk bearing, reduced supply–demand mismatches and can lead to Pareto-improving outcomes for all actors in the supply chain. In contrast with conventional wisdom that strategic behavior in the supply chain leads to poorer supply chain performance, our results illustrate that appropriately designed supply chain practices can actually exploit the strategic behavior of actors to improve supply chain performance. We conclude by illustrating the application of the proposed contracts to our motivating example of the fashion products supply chain.