Competing Manufacturers in a Retail Supply Chain: On Contractual Form and Coordination

Abstract

It is common for a retailer to sell products from competing manufacturers. How then should the firms manage their contract negotiations? The supply chain coordination literature focuses either on a single manufacturer selling to a single retailer or one manufacturer selling to many (possibly competing) retailers. We find that some key conclusions from those market structures do not apply in our setting, where multiple manufacturers sell through a single retailer. We allow the manufacturers to compete for the retailer's business using one of three types of contracts: a wholesale-price contract, a quantity-discount contract, or a two-part tariff. It is well known that the latter two, more sophisticated contracts enable the manufacturer to coordinate the supply chain, thereby maximizing the profits available to the firms. More importantly, they allow the manufacturer to extract rents from the retailer, in theory allowing the manufacturer to leave the retailer with only her reservation profit. However, we show that in our market structure these two sophisticated contracts force the manufacturers to compete more aggressively relative to when they only offer wholesale-price contracts, and this may leave them worse off and the retailer substantially better off. In other words, although in a serial supply chain a retailer may have just cause to fear quantity discounts and two-part tariffs, a retailer may actually prefer those contracts when offered by competing manufacturers. We conclude that the properties a contractual form exhibits in a one-manufacturer supply chain may not carry over to the realistic setting in which multiple manufacturers must compete to sell their goods through the same retailer.

Coordinating Contracts in SCM: A Review of Methods and Literature

“…In fact, the supply chain contracts which coordinate in a particular theoretic setting (under certain simplifications), may lead to very different results when implemented in real world situations. Cachon and Kok (2010) show that well-known coordinating contracts such as quantity-discount and two-part tariffs could worsen the performance of supply chain when applied in a two-tier topology with multiple competing suppliers. Accordingly, one should be very cautions when implementing these insights into practice.…”

How purchasing and supply management practices affect key success factors: the case of the offshore-wind supply chain

“…However, such contracts also force suppliers to compete more aggressively, which lowers their profits. Contract literature traditionally differentiates detailed and courtenforceable transactional contracts, such as those analyzed by Cachon and Kök (2010), from relational, more informal agreements between suppliers and buyers. Taylor and Plambeck (2007) note that relational contracts can be extremely effective in the earlier stages of new product development, when the design is ill-defined and demand forecasts are uncertain.…”

Leadership Selection in an Unlimited Three-Echelon Supply Chain

“…5. Finally, some papers focus on other optimisation tools such as queuing theory, Markov chain, backward induction, stochastic programming and genetic algorithm for solving coordination and cooperation problems in a supply chain, mostly in incomplete information games situations (Cachon, Kok 2010;Hennet, Arda 2008;Stein, Ginevicius 2010b;Zhen et al 2006;Kaviani et al 2011;Gupta, Weerawat 2006).…”