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Modeling of Responsive Supply Chain by M. Jenamani, S. P. Sarmah, B. Mahanty, M.K. Tiwari

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3
Supply Chain Coordination:
Modeling through Contracts
3.1 Introduction
A supply chain (SC) consists of a number of distinct entities that are respon-
sible for converting raw materials into nished product and making them
available to the nal customers to satisfy their demand in the least possible
time with the lowest possible cost. Managing the ows of materials, money,
and information in the SC network implies the presence of many decision
makers within the SC where each one operates a part of it. These decision
makers could be either distinct rms or managers of different departments
within a rm. When all the members of a SC are owned by a single indi-
vidual, it is termed a centralized supply chain (CSC). On the other hand, when
there are different owners for different entities, it is termed a decentralized
supply chain (DSC). In today’s business world, most of the supply chains
encountered are decentralized in nature. Individual members of a DSC have
conicting objectives and when an individual member optimizes locally, it
leads to an inefcient and high-cost solution for the entire SC. Because each
player acts out of self-interest, we usually see inefciencies in the system—
that is, the results look different than if the system was managed optimally
by a single decision maker who could decide on behalf of these players and
enforce the type of behavior dictated by this globally (or centrally) optimal
solution. Therefore, the major concern with supply chain management (SCM)
is how to align the individual decisions with the entire SC objectives to arrive
at a system optimal solution and reduce the SC inefciency. Potential solu-
tions to eliminate these inefciencies are vertical integration, coordination
through contracts, and collaboration.
3.1.1 Vertical Integration
In a vertically integrated rm, the entire control of the SC lies with a single
central decision maker. Vertical integration allows a company to obtain raw
materials at a low cost, and exert more control over the entire SC, in terms

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