A distributed coordination mechanism for supply networks with asymmetric information

The paper analyses the problem of coordination in supply networks of multiple retailers and a single supplier, where partners have asymmetric, private information of demand and costs. After stating generic requirements like distributedness, truthfulness, efficiency and budget balance, we use the apparatus of mechanism design to devise a coordination mechanism that guarantees the above properties in the network. The resulting protocol is a novel realisation of the widely used Vendor Managed Inventory (VMI) where the responsibility of planning is at the supplier. We prove that together with the required generic properties a fair sharing of risks and benefits cannot be guaranteed. We illustrate the general mechanism with a detailed discussion of a specialised version, assuming that inventory planning is done according to the newsvendor model, and explore the operation of this protocol through computational experiments.