Trust-based contracting in supply chains

Engineering robust, vibrant supply chains that allow flexibility, modularity, and scalability present open, important, and unsolved research challenges. As a result, supply chain management where rational agents represent interests of individual entities and organizations have been an area of active research [1]. Agent-based approaches typically attempt to optimize the profitability of entities with emphasis on pricing and scheduling. Researchers in business and management science, however, have recognized that a key component of decision-making in real-world supply chains is the consideration of trust between the contracting organizations [2].We use a contracting framework to allocate tasks: manufacturers announce contracts for tasks with given deadlines; suppliers bid on these tasks; and the contract is allocated to a highly trusted bidder. Trust of an agent is measured as the fraction of assigned tasks for which the agent could meet the deadline. We assume that the trust preferences of the contractor, the task deadline distribution and the performance distribution of the contractees are known. We then develop a precise bidding strategy for trust-building contractees. The motivation is to bid only on those tasks for which they have a high likelihood of meeting deadlines. However, not bidding on tasks also reduces the success rate of completing tasks. We provide a probabilistic analysis to handle this tradeoff.