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|Supply chain performance with target-oriented firms
|Chen, Lucy Gongtao
|Business::Operations management::Supply chain management
|Chen, L. G. & Tang, Q. (2021). Supply chain performance with target-oriented firms. Manufacturing & Service Operations Management. https://dx.doi.org/10.1287/msom.2021.1029
|Manufacturing & Service Operations Management
|We study a supply chain in which a supplier sets the whole-sale price and a retailer responds with an order quantity. Both of the two firms can be either risk-neutral—maximizing the expected profit—or target-oriented, which is to maximize her or his ability to reach a target profit. We provide strong support for firms’target-based preference and the linear target formation model through a survey as well as analyzing company data. With the firms’ target-oriented behavior evaluated by a CVaR-satisficing measure, we apply a game theoretical framework to investigate how the target-based preference affects supply chain performance. We find that, a firm, be it a supplier or a retailer, is always hurt by its target-based preference but can benefit from its trading partner’s target-based preference. A risk-neutral supplier, for example, can sometimes reap the whole supply chain’s profit if the retailer is target-oriented, and a target-oriented supplier always performs better with a target-oriented retailer than a risk-neutral one. Furthermore, a target-oriented retailer and/or supplier can help alleviate the double-marginalization effect and with a specific target, can help the supply chain achieve the same efficiency level as in a risk-neutral centralized system, with just a wholesale price contract. Another important finding is that if both firms are target-oriented, then the supply chain can have a higher expected profit under a decentralized system than a centralized one. This contrasts with the case when both firms are risk-neutral. We also investigate the role of outside option and retailer-type misidentification and find that both can alleviate the retailer’s disadvantage of being target-oriented.
|Nanyang Business School
|© 2021 INFORMS. All rights reserved. This paper was published in Manufacturing & Service Operations Management and is made available with permission of INFORMS.
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