Incentive Alignment and Coordination of Project Supply Chains

Incentive Alignment and Coordination of Project Supply Chains

By
Shi Chen, Hau L. Lee
Management Science. April
2017, Vol. 63, Issue 4, Pages 1105-1025

We consider a project supply chain where a manufacturer carries out a sequence of tasks, and each task requires certain key materials from a supplier. Since a fixed-price contract cannot attain channel coordination, we focus on time-based incentive contracts. Our proposed contract requires optimization of the material delivery schedule as well as the fraction and the timing of a delayed payment to each supplier. Under the contract, the manufacturer’s profit is affected by the variance but not by the mean of a supplier’s lead time. Each supplier benefits from a reduction in the mean or variance of his own lead time, whereas the supplier’s profit is independent of the duration of the on-site tasks and the lead times of other suppliers. The contract is also robust in various scenarios: in particular, coordination can be achieved even if the manufacturer’s estimate of the average delivery lead time is inaccurate.