Early order completion contract approach to minimize the impact of demand uncertainty on supply chains

Abstract

Many optimization techniques have been proposed over the years to improve the performance of supply chains. Although these approaches have been shown to be effective, most of them were developed without considering uncertainties in supply chains to simplify the analysis. In fact, uncertainties can deteriorate the performance of supply chains, such as increase in total cost, or drop in fill rate, of the whole system. In distributed supply chains, participating members are not under a sole control by a central authority, the problem is even more stringent due to incomplete information sharing, or so called asymmetrical information sharing. One way to improve the system performance is to achieve coordination among participating parties through establishment of contracts. The objectives of this paper are i) to evaluate the effects of demand uncertainty in a distributed supply chain, which is modelled as an agent-based system; ii) to propose a coordination mechanism with early order completion contract to minimize the negative impacts of demand uncertainty; and iii) to present associated simulation results. Performance of the system is measured in terms of costs and fill rate. Simulation results indicate that the proposed contract approach is able to improve the performance measures of the system. © 2006, IEE.