A multiscale decision theory analysis for revenue sharing in three-stage supply chains

Revenue sharing is an effective mechanism for coordinating decisions in a supply chain. For a three-stage supply chain, we explore how revenue-based incentives can be used by the stage 1 supply chain agent (retailer) to motivate cooperative behavior from its two upstream partners with conflicting interests. To illustrate our analysis, we provide a food supply chain example, with retailer, processor and farmer. Compared to the frequently studied two-stage problem, a three-stage supply chain leads to a more complex decision and incentive problem. To model and solve this more complex problem, we apply multiscale decision theory (MSDT), a novel approach for multi-level system analysis. MSDT enables us to account for uncertainties at all stages of the supply chain, not just at the final stage, and to derive analytic solutions. Results show and quantify the extent to which contracting and information sharing facilitate chain-wide cooperation. Further, it determines optimal decisions and incentives for agents at each stage. This paper is the first to apply MSDT to supply chains and contributes to its theory by advancing MSDT modeling and analysis capabilities. The modeling and solution approach can be applied to decision and inventive problems in other multi-level enterprise systems.