Third Party Support and Risk Costs in Supply Chain Coordination

It is broadly accepted that supply chain members which can jointly optimize their decisions, using techniques such as joint economic lot-sizing (JELS), will always produce equal or superior total profits than those supply chains which do not cooperate. In addition to increased profits, cooperation offers other established benefits. The majority of research has explored the use of coordination mechanisms (e.g. quantity discounts) to improve on purely competitive (arms-length) arrangements in supply chain purchase contracts. Though the use of these mechanisms can potentially improve profits, they often fail to offer any substantive guidance in implementing the proposed solution. Further, the JELS solution proposals often presuppose a spontaneous and effective coordination effort led by one or both supply chain parties. However, research has shown that very little meaningful cooperation occurs in practice. This thesis proposes and explores the novel use of an expert third party to assist in coordination and cooperation efforts of a contract-based dyadic (supplier-buyer) relationship. It is shown that coordination using a third party can, not only ensure optimal profits for the entire supply chain, but also provide significant contributions to the extant body of knowledge. These benefits include consideration of intangible factors such as neutral arbitration and protection of confidential information. An updated cost model accounts for many costs not typically considered in lot-sizing problems, including the introduction of the seller’s costs of commitment and contract costs. Numerical studies via simulation are performed to add insight into the implications of the updated model. Sensitivity and algebraic analyses are included for selected scenarios.

Many thanks to Kurt’s Dissertation Committee: Committee Chair: Avijit Banerjee, Ph.D., Professor of Decision Sciences Committee Member: Murugan Anandarajan, Ph.D., Professor and Department Head, Management, Decision Sciences & MIS Committee Member: Seung-Lae Kim, Ph.D., Professor of Decision Sciences Committee Member: Konstantinos Serfes, Ph.D., Professor of Economics Committee Member: Min Wang, Ph.D., Assistant Professor of Decision Sciences