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Optimizing product service system by franchise fee contracts under information asymmetry

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Abstract

This paper studies the problem of how to effectively provide product service system (PSS) in a service-oriented manufacturing supply chain under asymmetric private demand information. The PSS in the supply chain is operated heterogeneously and complementarily, in which the manufacturer provides the product while the retailer who possesses private demand information is responsible for adding the necessary value-added service on the basic product. We address the issue of how different contracts affect the decisions and profitability of the supply chain members. Three types of contracts are developed to help supply chain partners to make decisions and enhance the supply chain’s efficiency. The first is the franchise fee (FF) contract, under which the manufacturer provides a two-part tariff contract (wholesale price and franchise fee) to influence the retailer’s decision and to detect her private demand information. The second is the franchise fee with service requirement (FFS) contract, under which the manufacturer specifies the service level required in addition to the two-part tariff contract terms. The third is the franchise fee with centralized service requirement (FFCS) contract, which is similar to the FFS contract but that the service level specified by the manufacturer is the system optimal solution. Our analytical results show that all three contracts enable the manufacturer to detect the retailer’s private demand information, with the FFCS contract achieving the greatest channel profit. Finally, numerical examples are presented, and sensitivity analysis of service level and profit are conducted to compare the performance of the three contracts under different settings. The paper provides managerial guidelines for the manufacturer in contract offering under different conditions.

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Acknowledgements

This research was partially supported by the National Natural Science Foundation of China (71101028, 71371052, 70932004), the Specialized Research Fund for Doctoral Program of Higher Education (20090073110035), the Program for New Century Excellent Talents in University (NCET-13-0733), the Research Fund for Key Scientific and Innovation project of Shanghai Municipal Education Commission (09ZZ19), and the Program for Excellent Talents in UIBE. We would like to thank the editor and the anonymous referees for their constructive comments that have helped a lot in improving our paper.

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Authors and Affiliations

  1. Sino-US Global Logistics Institute, Shanghai Jiao Tong University, Shanghai, P.R. China

    Wenming Xie & Zhibin Jiang

  2. Department of Industrial Engineering & Logistics Management, School of Mechanical Engineering, Shanghai Jiao Tong University, Shanghai, P.R. China

    Wenming Xie & Zhibin Jiang

  3. School of International Trade and Economics, University of International Business and Economics, Beijing, 100029, P.R. China

    Yingxue Zhao

  4. Institute of Textiles and Clothing, Faculty of Applied Science and Textiles, The Hong Kong Polytechnic University, Hung Hom, Kolwoon, Hong Kong

    Pui-Sze Chow

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  1. Wenming Xie
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Correspondence to Yingxue Zhao.

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Xie, W., Zhao, Y., Jiang, Z. et al. Optimizing product service system by franchise fee contracts under information asymmetry. Ann Oper Res 240, 709–729 (2016). https://doi.org/10.1007/s10479-013-1505-2

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