Using financial incentives as a coordinating mechanism to improve the supply chain network integration

For a number of years, researchers have described and analysed the shift from traditional adversarial, 'arm's length' buyer-supplier relationships towards longer term, more cooperative relationships in which buyers and suppliers regard each other more as 'partners'. The supply chain management approach takes the view that companies do not seek to achieve profit improvements at the expense of their partners, but rather seek to make the supply network more competitive as a whole. This study tries to contribute to literature on supply chain management by explaining how to establish an incentive scheme to furnish reliable and truthful information in supply chains. This understanding can be a useful support for managers in their efforts to develop their supply networks. The results show that the coordinating policy with an incentive scheme can improve the overall channel profitability as well as the profitability of individual members in the chain beyond the traditional centralised policy. [Received 9 September 2006; Revised 13 March 2007; Accepted 18 May 2007]