Supply Chain Coordination in a Market with Customer Service Competition

Abstract

We consider a market with two competing supply chains, each consisting of one wholesaler and one retailer. We assume that the business environment forces supply chains to charge similar prices and to compete strictly on the basis of customer service. We model customer service competition using game‐theoretical concepts. We consider three competition scenarios between the supply chains. In the uncoordinated scenario, individual members of both supply chains maximize their own profits by individually selecting their service and inventory policies. In the coordinated scenario, wholesalers and retailers of each supply chain coordinate their service and inventory policy decisions to maximize supply chain profits. In the hybrid scenario, competition is between one coordinated and one uncoordinated supply chain. We discuss the derivation of the equilibrium service strategies, resulting inventory policies, and profits for each scenario, and compare the equilibria in a numerical study. We find that coordination is a dominant strategy for both supply chains, but as in the prisoner's dilemma, both supply chains are often worse off under the coordinated scenario relative to the uncoordinated scenario. The consumers are the only guaranteed beneficiaries of coordination.

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