Coordinating a Service Supply Chain under Arms Offset Program’s Intervention by Performance-Based Contracting

Abstract

This paper investigates a support service supply chain for coordinating with a local third-party logistics provider by arms offset program’s intervention and develops a performance-based contracting framework for the coordinating problem, which remains scarce in the literatures. The performance-based contracting framework evaluates payments and profits for the support service by a game-theoretical approach with principal-agent model. We prove that the proposed framework is an effective tool in acquiring the balance between maximum profit and minimum payment for both parties in the coordinating problem without moral hazard issue. A numerical study consolidates the formulated schemes as contracting preference for both parties’ decision with a higher profit margin at a lower customer’s payment.