Supply chain coordination with information design

Abstract

We consider the coordination of a supplier–retailer supply chain where, in addition to classical contract considerations, a supplier decides the adoption of an information structure (IS) for the supply chain, with a higher-quality IS allowing the supply chain parties to obtain a more accurate demand forecast. Because a wholesale price contract cannot coordinate the supply chain due to misaligned incentives of supply chain parties, we explore what common coordinating contracts in the classical coordination literature can continue coordinating the supply chain with the IS adoption. Interestingly, our analysis appears to reveal the power of simplicity: some simple classical coordinating contracts (e.g., the buy-back and revenue-sharing contracts), though not designed with the IS consideration, still coordinate the supply chain, whereas other more complicated classical contracts (e.g., the quantity flexibility and sales rebate contracts) fail to do so. We derive a general condition for supply chain coordination and show that any contract with a newsvendor-like transfer payment can coordinate the supply chain.