Strategic inventory and contracting in three-tier supply chain

Abstract

Problem Definition: This study explores the impact of strategic inventory on a three-tier supply chain within a two-period model. Previous research indicates that strategic inventory in a two-tier supply chain can eliminate double marginalization, thus enhancing the supply chain’s profit and social welfare. However, existing literature does not account for supply chains that feature a manufacturer linking the supplier and retailer, resulting in multiple strategic inventory holders. Methodology: A two-period model is constructed, comprising a three-tier decentralized supply chain with a supplier, a manufacturer, and a retailer. The study compares dynamic (D) and commitment (C) contracts, utilizing perfect Bayesian equilibrium to define a firm’s strategies. Results: The study reveals a novel inventory effect mechanism that emerges with the presence of a manufacturer, a phenomenon not observed in two-tier strategic inventory literature. Key findings include: (1) Utility: A three-tier supply chain can achieve a greater percentage profit increase by using less strategic inventory than a two-tier supply chain. The contract yielding maximum supply chain utility transitions from DD to CD and reverts to DD. In the DC model, where the manufacturer commits first, the supplier’s profits surprisingly diminish. Furthermore, the supplier’s and supply chain’s profits are non-monotonic, contrasting with those in the two-tier model. (2) Contractual game: The equilibrium outcome shifts from DD to CC due to the supplier’s anticipation of the manufacturer’s potential deviation. (3) Strategic inventory: The inventory level does not decrease monotonically in holding cost. The unexpected increase is caused by the opposing effects of the inventory trade-off and the asymmetric inventory effect between the manufacturer and retailer.

Date of Award	2024
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology
Supervisor	Ying Ju CHEN (Supervisor)