Optimisation Models for Supply Chain Coordination under Information Asymmetry

In a supply chain consisting of individualistic parties, the sharing of information is not always beneficial to each party. If a party discloses his private information it could undermine his bargaining position in the supply chain. Consequently, there is no incentive to share information, which results in information asymmetry between the involved parties. We consider a two-echelon supply chain setting viewed from the upstream party’s perspective, who faces an individualistic downstream party with private information. The upstream party uses mechanism-design techniques to maximise his own benefit by designing a menu of contracts, which is offered to the downstream party. Each contract specifies the procurement plan for the supply chain and a side payment. These side payments are the incentive mechanism to persuade the downstream party to accept a contract from the menu.
We consider this principal-agent contracting problem for several utility maximisation or cost minimisation problem settings. The goal is to determine a menu of contracts that is the most beneficial to the upstream party, whilst still being acceptable for the downstream party. To achieve this goal, we analyse a variety of optimisation models, which differ in the requirements of the menu of contracts. Our analysis provides insights into modelling approaches, structural properties of optimal menus, and solution methods.