Supplier Selection and Allocation Strategy: An Optimal Contract Model of Supply Chain Management Implementation

Abstract

We consider the problem of a retailer who implements supply chain management (SCM) to reduce his own and suppliers' costs by innovating purchasing processes. We examine the impact of SCM implementation on the number of suppliers involved over given time periods. To address the problem, this paper presents an optimal contract model that specifies the number of suppliers and their order volumes and provides that in order to offer the contract the retailer must have agreements from a desired number of suppliers to join the supply chain network. This problem is formulated as a noncooperative game between the retailer and suppliers. We found that the high setup cost to suppliers of joining the SCM decreased the number of suppliers while at the same time suppliers' benefit (cost reduction) increased. To gain bargaining power by having many suppliers, the retailer must choose suppliers who can anticipate high cost reduction. In addition, this paper gives managers an insight into the level of information technology use required to integrate the supply chain.