Coordination of Multi-Echelon Supply Chains Using the Guaranteed Service Framework

We investigate how to use the guaranteed-service (GS) framework for multi-echelon supply chains when different parts of the supply chain are controlled by two different parties. We find that this framework is naturally well suited for decentralized decision-making, and we propose a specific contract structure that facilitates such relationships. This contract is incentive compatible and has several other desirable properties. Under assumptions of complete and incomplete information, a reasonable negotiation process should lead the parties to contract terms that coordinate the supply chain. The contract is simpler than contracts proposed for coordination in the stochastic service (SS) framework. We also highlight the role of holding costs, and some of the difficulties that this might cause in coordinating a decentralized supply chain.