Dynamic Contract under Quick Response in a Supply Chain with Information Asymmetry

We investigate a dynamic contracting problem in a supply chain with a manufacturer selling a seasonal product through a retailer over two periods. In period 1, which is before the selling season, neither firm knows the demand information. The manufacturer runs on the regular production mode with low production cost but long lead time. In period 2, which refers to the selling season, only the retailer can update the demand information, so information asymmetry exists in the supply chain. The manufacturer may further produce and supplement the retailer via a second contract. However, only a mode of quick response with a shorter lead time but higher cost is viable, if the manufacturer decides not to carry inventory from period 1 to period 2. We formulate this dynamic contracting problem into four models based on whether the manufacturer adopts quick response or carries inventory. We show that the adoption of quick response may not always benefit the manufacturer due to the information rent she has to sacrifice, and the manufacturer may be better off under a higher cost of quick response. Interestingly, the capability of inventory carryover always hurts the manufacturer regardless of the implementation of QR. Essentially, we find that one of the hurdles of implementing these capabilities comes from the incentive issues in a decentralized supply chain. The retailer may ask for information rent whenever the manufacturer adopts a capability for supplying him in period 2, especially if this capability is inflexible that requires advance production before demand realization.

Automated summary

Investigated a dynamic contracting problem in a supply chain where quick response may not always benefit the manufacturer and inventory carryover capability always hurts the manufacturer. The main hurdle comes from incentive issues in a decentralized supply chain.