Pareto analysis of supply chain contracts under satisficing objectives

Supply chain coordination has become critical to firms as increased pressure is placed on them to improve performance. We evaluate the performance of Push, Pull, and Advance‐purchase discount (APD) contracts in a manufacturer–retailer supply chain where one or both firms have a satisficing objective of maximizing the probability of achieving a target profit. We identify the resulting operational modes of the supply chain and potential conflicts over the preferred contracts under the Push, Pull, and APD contracts. When both firms are satisficing, conflict over the preferred contract arises when the manufacturer has an ambitious profit target or the retailer has a low profit target. We show that the Push contract can result in a large decrease in the expected profit of a risk‐neutral manufacturer when the retailer maximizes the probability of achieving her maximum expected profit. We find that a modified buy‐back and profit guarantee contracts can provide significant Pareto improvement over Push or APD contracts when the manufacturer is risk‐neutral and the retailer is satisficing, while revenue‐sharing contracts cannot. In contrast, revenue sharing and modified buy‐back contracts are Pareto dominant under certain conditions when the manufacturer is satisficing and the retailer is risk‐neutral.