Risk, information and incentives in telecom supply chains

Supply chain management involves the selection, coordination and motivation of independently operated suppliers. The central planner's perspective in operations management translates poorly to vertically separated chains, where suppliers recurrently seem to object to benevolent information sharing and centralized decision rights. Seen from the supplier's perspective, such resistance may very well be rational. A downstream assembly line disclosing reliable information on actual and forecasted sales puts itself at a disadvantage when bargaining on share of chain profits. In this paper, we use a minimal agency model to contrast known optimal mechanisms with the actual practice in the telecommunications industry. A three-stage supply chain under stochastic demand and varying coordination and information asymmetry is modeled. A two-period investment-production game addresses the information sharing and specific investment problem in the telecom industry. The observed price-quantity contracts under limited commitment are shown to be inadequate under realistic asymmetric information assumptions. More a result of gradually evolving changes in bargaining power than coordination efforts, the upstream urge to coordinate may further deteriorate performance in terms of our model. (C) 2003 Elsevier Science B.V. All rights reserved.