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Channel coordination aims at improving supply chain performance by aligning the objectives of individual enterprises and the plans. It typically focuses on ordering decisions and inventory management in distributed inter-company settings. This models may involve multiple decision makers, asymmetric information multi-echelon inventory theory, as well as recent paradigms of manufacturing, such as short product life-cycles, mass customization, , and delayed differentiation and outsourcing. On the contract theory, the theoretical foundations of the coordination are based. Anantasubramania Kumar in 1992 first analysed and modelled the problem of channel coordination. In supply chains, the decentralized decision-making leads to a dilemma situation that results in double marginalization, which is a suboptimal overall performance. To improve the performance for all of the participants, partners in permanent supply chains tend to extend the coordination of their decisions. Few practical realizations of this approach are Forecasting, Collaborative Planning and Replenishment, Quick Response (QR), Vendor Managed Inventory (VMI).  The Channel coordination theory aims at supporting the performance optimization through developing arrangements for aligning the different partners’ objectives. These are called schemes or coordination mechanisms, that control the flows of materials (or service), information and financial assets along the chains.  A contracting scheme should consist the following components:

  • An infrastructure and protocol for information sharing
  • An incentive scheme for supporting the individual interests of the partners
  • Local planning methods that consider the objectives and constraints of the individual partners

For optimizing the behaviour of the production, the appropriate planning methods are necessary. The second component facilitates the realization of real-time enterprises and supports the transparency and information visibility both within and among the partners. Lastly, the third component must guarantee that the partners act upon to the common aims of the supply chain.  For studying coordination, the general method consists of two steps. At first, a central decision maker is assumed with complete information for solving the problem.  The result is a first-best solution that provides bound on the available system-wide performance objective. In the second step, one regarded the designs and decentralized problem such a contract protocol to approach or even achieves the performance of the first-best. A contract is supposed to coordinate the channel when the partners’ optimal local decisions lead to optimum system-wide performance. In several simple models, the channel coordination is achievable but it is more difficult in the practice and more realistic cases. Compared to the uncoordinated situation, the aim is only the achievement of mutual benefit. The application of some negotiation protocols is the widely studied alternative direction for channel coordination. Such approaches apply iterative solution methods; here the partners exchange counter-proposals and proposals until an agreement are reached. Because of this reason, this approach is commonly referred to as collaborative planning. According to the following criteria, the negotiation protocols can be characterized.

  • The initial proposal is most often generated by the buyer company which is known as upstream planning. By contrast, it is referred to as downstream planning, when the initiator is the supplier. In numerous cases an initial plan exists.  There are also various protocols where the initial plan is randomly generated.
  • The maximal number of rounds should be determined to guarantee finite runtime, with this; the protocol should also identify the number of plans which is offered in each round. When the number of plans or rounds is high, the practical application necessitates local planner systems to generate quickly counter-proposals and evaluate the proposals.
  • The negotiation protocol does not provide optimality, and to assure convergence, they require some special conditions.
  • The counter-proposals typically define side-payments among the companies to inspire the partner differing from its formerly proposed plan.
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