Stability issues in supply chain networks: Implications for coordination mechanisms

Abstract

With supply chains evolving into complex networks of diverse and independent economic entities, supply chain coordination has emerged as a key management capability for improving overall performance of the network. For long term sustainability, it is important that such networks remain stable with little incentive for players to sever their linkages, especially in supply chains with participative constraints on their members. While topic of coordination has received vast attention from both academia and practitioners, the issues related to network stability have not been addressed adequately. In order to bridge this gap in the literature, we focus on a two tier supply chain network competing with independent producers. The network involves a marketing agent that coordinates activities among the network producers via a price and pro t sharing based coordination mechanism.We develop a (noncooperative) game theoretic model and analyze the impact of the coordination mechanism on stability of the network. In particular, we focus on three factors: cost parameters, number of producers vis-a-vis level of competition, and pro t sharing. We derive response functions for the players involved and show that optimal decisions by coordination leads to Nash equilibrium for the supply chain. In addition, we develop structural results to characterize stability of the network. Our results show that while pro t sharing parameter of the coordination mechanism has no impact on network surplus, it has implications for network stability. These results bring out relationship between the factors of interest and provide insights for determining the decision parameters of the coordination mechanism.