A three-echelon supply chain with price-only contracts and sub-supply chain coordination

This paper studies coordination in a three-echelon supply chain and examines the impact of sub-supply chain coordination (sub-coordination). Our analysis is based on the price-only contracts that are commonly used in practice. The model is of the newsvendor type. We consider the following cases: no coordination between any members of the supply chain (decentralized), coordination between only two members (sub-supply chain coordination) and coordination of the whole supply chain as a benchmark. We explicitly analyze the order quantity and contracting decisions for a decentralized three-echelon supply chain. We compare supply chain efficiency when there is upstream coordination and when there is downstream coordination and show that the former is more efficient than or as efficient as the latter. In our setting, the difference between upstream and downstream sub-supply chain coordination is equivalent to the shortage cost transfer. We find that both the supplier and the retailer would prefer to act alone rather than to coordinate with the manufacturer when sub-supply chain coordination is suggested. This contradiction may partly explain the popularity of price-only contracts in practice.