Responsibility Tokens in Supply Chain Management

The decentralized supply chain management scheme of Lee and Whang (1999) can be viewed as operationalizing the decentralized management scheme implicit in Clark and Scarf (1960). This paper proposes the use of what are called responsibility tokens (RTs) to further facilitate that operationalization. The proposal assumes that a management information system, presumably electronic, is established to monitor inventories and shipment quantities, and to carry out transfer payments between players. As in Lee and Whang (1999), the incentives of the system are aligned, so if each player is brilliantly self serving, the system optimal solution will result. While the system administrator need not know how the system should be managed, the upstream-most player must know how to manage the system optimally for the system optimal solution be achieved. RTs endow the system with an attractive self correcting property: An example illustrates that upstream players are given a mechanism and the incentive to correct for downstream over-ordering. The downstream players who over-order are penalized, but system performance is not degraded much. Extensions and further research are also discussed.