Int. J. Production Economics 89 (2004) 131–139 Supply chain coordination by revenue sharing contracts Ilaria Giannoccaro*, Pierpaolo Pontrandolfo DIMEG, Politecnico di Bari, Viale Japigia 182, 70125 Bari, Italy Received 15 April 2002; accepted 18 November 2002 Abstract Supply chain (SC) coordination can be pursued by adopting a centralized or decentralized decision-making approach. The former option occurs when there is a unique decision maker in the SC, the latter when several independent actors make decision at the different SC stages. SC contracts are a useful tool to make the several SC actors of a decentralized setting behave coherently among each other, as if the chain were operated in a centralized fashion. In this paper, we propose a model of an SC contract aimed at coordinating a three-stage SC, which is based on the revenue sharing mechanism. This model allows the system efficiency to be achieved as well as it could improve the profits of all the SC actors, by tuning the contract parameters. r 2003 Elsevier Science B.V. All rights reserved. Keywords: Supply chain; Contracts; Revenue sharing; Decentralized control 1. Introduction Research on SCM has mainly focused on the coordination of supply chains (SCs) wherein control is centralized. A centralized control involves the existence of a unique decision-maker in the SC, who should possess all the information on the whole SC that is relevant to make decision as well as the contractual power to have such decisions implemented. The centralized control assures the system efficiency (channel coordina- tion). However, both conditions are difficult to be verified, which often make the hypothesis of a centralized control not realistic. In such cases, a decentralized control of the SC is more appro- priate. This involves the existence of several decision makers (SC actors) pursuing different objectives, possibly conflicting among each other. In fact, a behavior that is locally rational could be globally inefficient (Whang, 1995). Coordination mechanisms are then necessary so as to have local decision-makers pursue channel coordination. Such coordination mechanisms include the supply chain contracts, which formally rule the transac- tions between the SC actors. The latter utilize incentives to make SC actors’ decisions coherent among each other. In particular, the incentives let the risk and the revenue (which arise from different sources of uncertainty and from channel coordination, respectively) be shared by all SC actors. Therefore, SC contracts allow two main objec- tives to be achieved: (i) to increase the total SC profit so as to make it closer to the profit resulting ARTICLE IN PRESS *Corresponding author. Tel.: +39-080-596-2723; fax: +39- 080-596-2788. E-mail address: ilaria.giannoccaro@dimeg.poliba.it (I. Giannoccaro). 0925-5273/03/$-see front matter r 2003 Elsevier Science B.V. All rights reserved. doi:10.1016/S0925-5273(03)00047-1