Capacity investments in supply chains: sharing in the gain rather than sharing the pain

Capacity investments in supply chains: sharing in the gain rather than sharing the pain

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Article ID: iaor20043420
Country: United States
Volume: 5
Issue: 4
Start Page Number: 317
End Page Number: 333
Publication Date: Sep 2003
Journal: Manufacturing & Service Operations Management
Authors:
Keywords: supply chain, contracts, capacity planning
Abstract:

In this paper, we investigate price-only contracts in supply chain capacity procurement games. For a two-party supply chain, comprising a manufacturer and a supplier that both invest in capacity, we prove the existence of a class of coordinating price-only contracts that arbitrarily allocate the supply chain profit. Moreover, if the supplier's reservation profit is below a certain threshold, the manufacturer's optimal contract is a quantity-premium price-only schedule, that is, the average wholesale price per unit increases in the order size. We prove that the manufacturer prefers simple piecewise-linear quantity-premium contracts to linear contracts and show numerically that such contracts are highly efficient. We extend our results for piecewise-linear price schedules to N-supplier assembly systems. We also enrich the voluntary compliance regime of Cachon and Lariviere. With this enrichment, we prove that share-the-pain contracts, such as firm commitment and options contracts, increase supplier capacity in the full information case, a result that contrasts with that of Cachon and Lariviere. Finally, we investigate when a manufacturer prefers single-breakpoint quantity premiums to firm commitments.

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