Automating Supply Chain Contracts in the Presence of Demand Shifts and Contract Execution Lag

Problem definition: Effective responses to abrupt demand shifts encountered by a supply chain require quick identification of market shifts and an update of supply chain contracts; however, such response efforts are often hampered because the updated contracts cannot be timely executed due to contract execution lag. This paper proposes an automated (short-term wholesale price) contract embedding with demand shift analysis, which can be enabled by blockchains and other IT developments, to meet this challenge. We examine the possible adoption of the proposed automated contract by assessing its value to firms in supply chains.Methodology/results: We develop an analytical model in which a supply chain can adopt either a conventional non-automated (long-term) contract or an automated contract in response to a potential demand shift. Under the automated contract, the wholesale prices are dynamically updated based on embedded Bayesian detection of the demand shift. A higher automation level means a smaller lag in executing the updated wholesale prices. A fully automated contract is known as a smart contract. We find that the magnitude and timing uncertainty of the demand shift are positive factors that favor the adoption of the automated contract in a supply chain. We also extend the model and explore the effect of supply chain competition on the adoption of automated contracts when two supply chains have Cournot competition.Managerial implications: Contrary to the conventional wisdom that smart contracts become more valuable as market uncertainties increase, an increase in timing uncertainty does not necessarily favor the adoption of fully automated smart contracts relative to partially automated alternatives. Although automated contracts can help a supply chain gain competitive advantage, a high competition intensity does not favor the adoption of automated contracts because a supply chain's marginal production cost savings of using automated contracts decreases as the competition intensity increases