Hierarchical Screening for Capacity Allocation in Supply Chains: The Role of Distributors

Abstract

W e consider a two-stage principal-agent screening environment in a decentralized supply chain with retailers, distributors, and a supplier. The retailers possess private information regarding their local market profitabilities. The distributors can partially observe the retailers' profitabilities and are heterogeneous with regard to the precision of that information. The supplier determines the level of production, but knows neither the local market profitabilities nor the precision of the distributors' information. The supplier first allocates finished products to distributors, and the distributors then contract with local retailers with a capacity constraint. We find that due to the distributors' superior information, the quantity distortion on the retailers' side is mitigated, and the upstream information asymmetry subsequently affects the quantity allocation among the downstream retailers. The supplier may not benefit from contracting with the distributors. In addition, no distributor is excluded based on the heterogeneity of the information precision, even though some distributors do not have better information than the supplier. In the numerical examples, we further analyze how the local market heterogeneity and inventory costs affect the capacity allocation, the retailers' payoffs, and the supply chain profits. We document some counter-intuitive quantity allocation rules that arise from the distributors' information advantage.Note 1 For example, AmBev, the largest beverage company in Latin America, imports and distributes Pepsi-Cola, Heine-ken and Skol to local resellers through its own network. The wine and spirits imported by the National Distributing Company are sold throughout the United States by over 50,000 retailers. Contracting with more than 160 regional dealers, Hyundai Car (UK) imports and sells vehicles overseas through these dealers. US Lumber imports forest products from Europe, Canada, South America, and Mexico to meet customers' demands in different states.

Making agency theory work for supply chain relationships: a systematic review across four disciplines

“…Coordination indirectly mitigates an agent's self-interested behaviour by decreasing information asymmetry and aligning goals. Coordination may also relate to the systematic optimization of capacity allocations (Chen et al, 2014) and inventory levels (Corbett, 2001;Zsidisin and Ellram, 2003) among multiple parties of the supply chain and other tasks undertaken by parties to form cross-task synergies (Makadok and Coff, 2009). Finally, Argyres (1999) posits that use of information systems may enhance coordination by making information processing more cost efficient Supply chain agency relationships which also improves governance when parties have a transparent view on the actions of other parties.…”

“…A similar assumption holds for franchising relations. The rationale is that this time the downstream agent has an informational advantage in areas like market value (Chen et al, 2014), how active it is in promoting and selling products (Celly and Frazier, 1996), how well it meets service standards in franchising (Massimo and Lawrence, 2019). This analogy could easily be applied to buyersupplier relationships meaning that especially in situations of complex technologies, the buyer may act as an agent to the supplier, when (mis)using the supplier's components in its own manufacturing process and the supplier does not have sufficient information on the process.…”

“…Coordination indirectly mitigates an agent's self-interested behaviour by decreasing information asymmetry and aligning goals. Coordination may also relate to the systematic optimization of capacity allocations (Chen et al. , 2014) and inventory levels (Corbett, 2001; Zsidisin and Ellram, 2003) among multiple parties of the supply chain and other tasks undertaken by parties to form cross-task synergies (Makadok and Coff, 2009).…”

“…A similar assumption holds for franchising relations. The rationale is that this time the downstream agent has an informational advantage in areas like market value (Chen et al. , 2014), how active it is in promoting and selling products (Celly and Frazier, 1996), how well it meets service standards in franchising (Massimo and Lawrence, 2019).…”

Strategic Capacity Planning Problems in Revenue‐Sharing Joint Ventures

“…Kim and Tomlin (2013) focused on technological systems that potentially face an outage and study investment decisions in recovery capacity and/or failure prevention so as to enhance system availability. Chen et al (2014)studied capacity allocation model in supply chains with distributors as information intermediaries. Besides the single-location, single-period models, Van Mieghem and Rudi (2002) introduced newsvendor networks to study the stochastic capacity investment decisions.…”