The design of contracts to coordinate operational interdependencies within the supply chain

The paper presents an approach to design optimal contracts to coordinate decisions within a supply chain. We consider two partners, a producer and a supplier who agree on the setting of a contract by maintaining their individual private information and their autonomous decision rights. The paper shows how to design optimal contracts in view of their anticipated operational consequences. We are focusing on two prominent types of contracts, a total order-delivery commitment and an incentive-based operational just-in-time coordination. These contracts affect both the capacity adaptation and the production planning level, giving rise to a highly involved medium-and short-term bi-level (hierarchical) decision problem. A numerical analysis is employed, and quantitative results are presented to evaluate the appropriateness of the various contracts. (C) 2003 Elsevier B.V. All rights reserved.