Service-Level Agreements and Supply Chain Coordination

In this dissertation I investigate contracting and coordination in a two-tier supply chain. First, in Chapter 2 I experimentally investigate how altering the inventory risk affects both the total supply chain profits and the distribution of profits between the two parties. I evaluate three contracts, each differing in which party incurs the risk associated with unsold inventory; a Push contract where the retailer incurs the risk, a Pull contract where the supplier incurs the risk, and an Advance-Purchase Discount (APD) contract where both parties share the risk. I find that, contrary to standard theory, the APD contract maintains or exceeds the Push contract in terms of both retailer and supplier profits, suggesting that a Push contract should never be considered when an APD contract is a possibility.In Chapter 3 I narrow the focus of the dissertation and consider only Pull contracts. I investigate three Pull contracts in a controlled laboratory environment: a wholesale price contract and two coordinating contracts. The primary result of this section is that the theoretical benefit of the two coordinating contracts over the wholesale price contract does not perfectly translate into practice. Instead, subjects set wholesale prices too high and the second contract parameter too low in the coordinating contracts. I explore alternative models to explain this behavior and find that a model of anticipated regret fits the data well.In Chapter 4 I again narrow the dissertation's focus and study service-level agreements (SLAs), a type of contract where a retailer pays a bonus to a supplier when the supplier satisfies a certain fraction of the retailer's demand (fill rate). Specifically, I investigate a unique class of SLAs which I call "Grace" SLAs. Grace SLAs consider the fill rate separately for each stocking decision, as opposed to aggregating the fill rate, and awards the bonus if the fill rate is achieved a certain number of times out of all stocking decisions. I find that Grace SLAs increase both retailer and supplier profitability beyond that of a wholesale price contract in a number of scenarios.