There are several classifications of channel coordination contracts, but they are not complete, and the considered classes are not disjoint. Instead of a complete classification, a set of aspects are enumerated below which generalizes the existing
taxonomies by allowing classification along multiple viewpoints.
Problem characteristics Horizon Most of the related models consider either
one-period horizon or
two-period horizon with forecast update. In the latter, the production can be based on the preliminary
forecast with normal production mode or on the updated forecast with emergency production, which means shorter
lead-time, but higher cost. Besides, the horizon can consist of
multiple periods and it can be even
infinite. The practically most widespread approach is the
rolling horizon planning, i.e., updating and extending an existing plan in each period.
Number of products Almost all contract-based models regard only one
product. Some models study the special cases of
substitute or
complementary products. However, considering more products in the general case is necessary if technological or financial constraints—like capacity or budget limits—exist.
Demand characteristic On one hand, the
demand can be
stochastic (uncertain) or deterministic. On the other hand, it can be considered static (constant over time) or dynamic (e.g., having
seasonality).
Risk treatment In most of the models the players are regarded to be
risk neutral. This means that they intend to maximize their
expected profit (or minimize their expected costs). However, some studies regard
risk averse players who want to find an acceptable
trade-off considering both the expected value and the
variance of the profit.
Shortage treatment The models differ in their attitude towards
stockouts. Most authors consider either backlogs, when the demand must be fulfilled later at the expense of providing lower price or
lost sales which also includes some theoretical costs (e.g., loss of goodwill, loss of profit, etc.). Some models include a
service level constraint, which limits the occurrence or quantity of expected stockouts. Even the 100% service level can be achieved with additional or emergency production (e.g., overtime, outsourcing) for higher costs.
Parameters and variables This viewpoint shows the largest variations in the different models. The main decision variables are quantity-related (production quantity, order quantity, number of options, etc.), but sometimes prices are also decision variables. The parameters can be either constant or stochastic. The most common parameters are related to costs: fixed (ordering or
setup) cost, production cost and inventory holding cost. These are optional; many models disregard fixed or inventory holding costs. There exist numerous other parameters: prices for the different contracts,
salvage value, shortage penalty, lead-time, etc.
Basic model and solution technique Most of the one-period models apply the
newsvendor model. On two-period horizon, this is extended with the possibility of two production modes. On a multiple period horizon the
base-stock, or in case of deterministic demand the
EOQ models are the most widespread. In such cases the optimal solution can be determined with simple algebraic operations. These simple models usually completely disregard technological constraints; however, in real industrial cases resource capacity, inventory or budget constraints may be relevant. This necessitates more complex models, such as
LP,
MIP,
stochastic program, and thus more powerful
mathematical programming techniques may be required. As for the optimization criteria, the most usual objectives are the
profit maximization or
cost minimization, but other alternatives are also conceivable, e.g., throughput time minimization. Considering
multiple criteria is not yet prevalent in the coordination literature.
Decentralization characteristics Number and role of the players The most often studied dilemmas involve the two players and call them
customer and
supplier (or buyer-seller). There are also extensions of this simple model: the multiple customers with
correlated demand and the multiple suppliers with different production parameters. Multi-echelon extensions are also conceivable, however, sparse in the literature. When the coordination is within a supply chain (typically a customer-supplier relation), it is called
vertical, otherwise
horizontal. An example for the latter is when different suppliers of the same customer coordinate their
transportation. Sometimes the roles of the participants are also important. The most frequently considered companies are
manufacturers,
retailers,
distributors or
logistic companies.
Relation of the players One of the most important characteristics of the coordination is the
power relations of the players. The power is influenced by several factors, such as possessed process
know-how, number of
competitors, ratio in the
value creation, access to the market and financial resources. The players can behave in a cooperative or
opportunistic way. In the former case, they share a common goal and act like a team, while in the latter situation each player is interested only in its own goals. These two behaviors are usually present in a mixed form, since the opportunistic claims for profitability and growth are sustainable usually only with a certain cooperative attitude. The relation can be temporary or permanent. In the temporary case usually one- or two-period models are applied, or even an auction mechanism. However, the coordination is even more important in permanent relations, where the planning is usually done in a rolling horizon manner. When coordinating a permanent supply relation, one has to consider the
learning effect, i.e., players intend to learn each other's private information and behavior.
Goal of the coordination The simplest possible coordination is aimed only at aligning the (material) flows within the supply chain in order to gain executable plans and avoid shortages. In a more advanced form of coordination, the partners intend to improve supply chain performance by approaching or even achieving the optimal plan according to some criteria. Generally, a coordinated plan may incur losses for some of the players compared to the uncoordinated situation, which necessitates some kind of side-payment in order to provide a
win-win situation. In addition, even some sort of
fairness may be required, but it is not only hard to guarantee, but even to define. Most of the coordination approaches requires that the goal should be achieved in an
equilibrium in order to exclude the possibility that an opportunistic player deviates from the coordinated plan.
Information structure Some papers study the symmetric information case, when all of the players know exactly the same parameters. This approach is very convenient for
cost and profit sharing, since all players know the incurring system cost. The asymmetric case, when there is an information gap between the players is more realistic, but poses new challenges. The asymmetry typically concerns either the cost parameters, the capacities or the quantities like the demand forecast. The demand and the forecast are often considered to be
qualitative, limited to only two possible values: high and low. In case of stochastic demand, the uncertainty of the forecasts can also be private information.
Decision structure The
decision making roles of the players depend on the specified decision variables. However, there is a more-or-less general classification in this aspect:
forced and
voluntary compliance. Under forced compliance the supplier is responsible for satisfying all orders of the customer, therefore it does not have the opportunity to decide about the production quantity. Under voluntary compliance, the supplier decides about the production quantity and it cannot be forced to fill an order. This latter is more complex analytically, but more realistic as well. Even so, several papers assume that the supplier decides about the price and then the customer decides the order quantity.
Game theoretic model From the viewpoint of
game theory the models can take
cooperative or
non-cooperative approaches. The cooperative approach studies, how the players form
coalitions therefore these models are usually applied on the strategic level of
network design. Other typical form of cooperative games involves some
bargaining framework—e.g., the
Nash bargaining model—for agreeing upon the parameters of the applied contracts. On the other hand, on the operational level, the non-cooperative approach is used. Usually the sequential
Stackelberg game model is considered, where one of the players, the
leader moves first and then the
follower reacts. Both cases—the supplier or the customer as the Stackelberg leader—are widely studied in the literature. In case of
information asymmetry, a similar sequential model is used and it is called
principal–agent setting. The study of the long-term supply relationship can also be modeled as a
repeated game. To sum up, a collaboration generally consists of a cooperative, followed by a non-cooperative game. However, most researches concentrate only on one of the phases.
Involvement of a mediator Some coordination mechanisms require the existence of an independent, trusted third party. If such a mediator exists, the powerful theory of the market
mechanism design can be applied for channel coordination. Although at first glance the involvement of a third party seems to be unrealistic, in the area of planning such mediators already exist as
application service providers. == Contract types ==