Extending the Horizons: Environmental Excellence as Key to Improving Operations
Manufacturing & Service Operations Management
Quality Improvement Incentives and Product Recall Cost Sharing Contracts
Management Science
A decision framework for the analysis of green supply chain contracts: An evolutionary game approach
Expert Systems with Applications: An International Journal
Double moral hazard in a supply chain with consumer learning
Decision Support Systems
A review of modeling approaches for sustainable supply chain management
Decision Support Systems
Double Counting in Supply Chain Carbon Footprinting
Manufacturing & Service Operations Management
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There are many materials for which the quantity needed by a firm is at best indirectly related to the quantity of final product produced by that firm, such as solvents in manufacturing processes or office supplies. For any such "indirect" materials, an inescapable incentive conflict exists: The buyer wishes to minimize consumption of these indirect materials, while the supplier's profits depend on increasing volume. Both buyer and supplier can exert effort to reduce consumption, hence making the overall supply chain more efficient. However, no supplier will voluntarily participate unless contract terms are fundamentally revised. This can be done through a variety of "shared-savings" contracts, where both parties profit from a consumption reduction. This paper analyzes several such contracts currently in use for chemicals purchasing. We show that such contracts can always increase supply-chain profits but need not lead to reduced consumption. We analyze equilibrium effort levels, consumption, and total profits, and show how these change with the contract parameters. We find that the goals of maximizing joint profits and minimizing consumption are generally not aligned. Also, surprisingly, a decrease in a cost parameter can lead to a decrease in profits; it may be necessary (but is always possible) to renegotiate the shared-savings contract to reap the benefits of a cost decrease.