Supply quality management with wholesale price and revenue-sharing contracts under horizontal competition

In a number of industries (e.g., the airplane industry, aerospace industry, auto industry, or computer industry), certain suppliers essentially have a monopoly on the production technology for key components, and inevitably manufacturers in these industries have common suppliers. A key part of manufacturers’ work with suppliers concerns improving the quality of their respective products, which gives rise to a collaborative activity usually termed as “supply quality management”. When the manufacturers are competitors, they do not wish to see a common supplier dividing his involvement in quality improvement unequally between themselves and their rivals. However, as the suppliers collaborate with several manufacturers, it is highly questionable whether their efforts will be strictly equivalent for each manufacturer. In this paper, a non-cooperative dynamic game is formulated in which a single supplier collaborates with two manufacturers on design quality improvements for their respective products. The manufacturers compete for market demand both on price and design quality. The paper analyzes how each party should allocate resources for quality improvement over time. In order to take into account the potential coordinating power of the compensation scheme adopted in this type of decentralized setting, we compare the possible outcomes under a wholesale price contract and a revenue-sharing contract.     

Outsourcing to suppliers with unknown capabilities

We investigate the make-buy decision of a manufacturer who does not know its potential suppliers’ capabilities. In order to mitigate the consequences of this limited knowledge, the manufacturer can either perform in-house or audit suppliers. An audit reveals the audited supplier’s capability such that the manufacturer can base the make-buy decision on the audit outcome; the manufacturer might also learn from the audit and update its beliefs about the capabilities of the unaudited suppliers. Interestingly, using a very general model we find that the manufacturer’s decision can be independent of both the number of available suppliers and of the mechanism it uses to update its beliefs after an audit. We illustrate our general model by considering a possible application, where a manufacturer is making the outsource-audit decisions when the suppliers are more cost effective. However, when outsourcing to supplier, the manufacturer would face the uncertainty of whether or not the delivered task can integrate well with the other parts of the project.     

Analyzing online B2B exchange markets: Asymmetric cost and incomplete information

This research applies the discriminating auction to analyze the online B2B exchange market in which a single buyer requests multiple items and several suppliers having equal capacity and asymmetric cost submit bids to compete for buyer demand. In the present model, we examine the impact of asymmetric cost and incomplete information on the participants in the market. Given the complete cost information, each supplier randomizes its price and the lower bound of the price range is determined by the highest marginal cost. In addition, the supplier with a lower marginal cost has a larger considered pricing space but ultimately has a smaller equilibrium one than others with higher marginal costs. When each supplier’s marginal cost is private information, the lowest possible price is determined by the number of suppliers and the buyer’s reservation price. Comparing these two market settings, we find whether IT is beneficial to buyers or suppliers depends on the scale of the bid process and the highest marginal cost. When the number of suppliers and the difference between the highest marginal cost and the buyer’s reservation price are sufficiently large, each supplier can gain a higher profit if the marginal costs are private information. On the contrary, when the highest marginal cost approaches the buyer’s reservation price, complete cost information benefits the suppliers.     

More than a second channel? Supply chain strategies in B2B spot markets

The emergence of B2B spot markets has greatly facilitated spot trading and impacted supply chain structures as well as the way commercial transactions take place between firms in many industries. While providing new opportunities, the B2B spot market also exposes participants to a price risk. This new business landscape raises some important questions on how the supplier and manufacturer should change their sales channel and procurement strategies and tailor their decisions to this changing environment. In this paper, we study the channel-choice, pricing and ordering/production decisions of the risk-averse supplier and manufacturer in a two-tier supply chain with a B2B spot market. Our analysis shows that, to benefit from the B2B spot market and control the risk exposure, the upstream supplier should develop an integrated channel-choice and pricing strategy. When the supplier adopts a dual-channel strategy, the equilibrium contract price decreases in the supplier’s risk attitude, but increases in the demand uncertainty. However, it first decreases and then increases in the manufacturer’s risk attitude and spot price volatility. We conclude that rather than simply being a second channel, the B2B spot market provides a strategic tool to supply chain members to achieve an advantageous position in their contract trading.     

Manufacturer cooperation in supplier development under risk

Supplier development involves efforts undertaken by manufacturing firms to improve their suppliers’ capabilities and performance. These improvement efforts can be targeted at a variety of areas such as quality management, product development, and cost reduction. Since supplier development requires investments on the part of the manufacturer, it is important to optimally allocate investment dollars among multiple suppliers to minimize risk while maintaining an acceptable level of return. This paper presents a set of optimization models that address this issue. We consider two scenarios: single-manufacturer and multiple suppliers (SMMS) and two-manufacturer and multiple suppliers (TMMS). In the SMMS case, we suggest optimal investments in various suppliers by effectively considering risk and return. The TMMS case investigates whether manufacturers with differing capabilities could gain risk reduction benefits from cooperating with each other in supplier development. Through illustrative applications, we identify conditions in which both cooperation and non-cooperation are beneficial for manufacturers. Under conditions of cooperation, we propose optimal investments for manufacturers to achieve high levels of risk reduction benefits.     

Quality investment and inspection policy in a supplier–manufacturer supply chain

This paper examines a serial supply chain that consists of one supplier and one manufacturer, each having imperfect production and inspection processes. Both the supplier and the manufacturer invest in quality improvement actions in their production processes to reduce defective items being produced. In addition to quality investment, the supplier engages in outbound inspection before sending the components to the manufacturer, and the manufacturer engages in inbound inspection, when receiving the components from the supplier, and outbound inspection, before sending final products to customers. We investigate the supplier’s and the manufacturer’s quality investment and inspection strategies in four noncooperative games with different degrees of information revealed. We study the effects of inspection-related information on both parties’ equilibrium strategies and profits, and further assess, at equilibrium, the rationality of the penalty on defective components.     

A dynamic model of supplier switching

While a broad branch of literature deals with the development of buyer–supplier relationships, limited research exists under which circumstances a buyer should terminate such a relationship and switch to a new supplier. Recently, Wagner and Friedl (2007) have developed a framework to analyze a static one-shot supplier switching decision when the buyer has asymmetric information about the supplier’s production costs. We extend their basic framework to a dynamic one, assuming that the supplier learns the production costs over time when he sets up the production process. Since the supplier’s cost information at the individual stages crucially determines the setup and the switching decision, it becomes essential for supply chain management to provide proper incentives so that the supplier reveals his cost information truthfully over time. We characterize the optimal setup and switching strategy as well as the optimal supply chain contract. We also compare our findings with those of the static setting to provide further insights.     

Random yield supply chain with a yield dependent secondary market

This paper considers a simple supply chain with one supplier and one retailer where the supplier’s production is subject to random yield and the retailer faces uncertain demand. There exists a secondary market for acquiring or disposing products by the supplier. We study both the centralized and decentralized systems. In the decentralized system, a no risk sharing contract and a risk sharing minimum commitment contract are analyzed. The supply chain with the risk sharing contract is further analyzed with a constant secondary market price and a yield dependent secondary market price. We present both the supplier’s and the retailer’s optimal strategies and provide insights for managers when making decisions under random yield risk and demand uncertainty. We find that the secondary market generally has a positive impact on supply chain performance and the actual effect of random yield risk on the supply chain performance depends on cost parameters and supply chain contract settings. Under certain conditions, reducing yield randomness may weaken the double marginalization effect and improve the chain performance. From the numerical study, we also show that there exists an optimal commitment level for the supply chain.     

A comparison of two sourcing tactics for a new component

We compare two sourcing tactics for a manufacturer to purchase a new component to be used in a one-time production run of a new product with uncertain and price-elastic demand. One alternative is to issue a request-for-quote (RFQ), which is where the manufacturer requests a price-quantity schedule from suppliers. The manufacturer uses this information to determine a production quantity and the number of components to purchase from each supplier. The other alternative is to post a bid specifying how the manufacturer’s purchase quantity will depend on the supplier’s component price. The suppliers use this information to compete on quantity.We find that relative to RFQ, which is more challenging for the manufacturer to characterize the supplier response due to the possibility of supplier interaction, the benefit to the manufacturer from posting a bid increases with the number of suppliers due to increased intensity of competition. If the new component is from an emerging industry where there is little mutual awareness among candidate suppliers, then regardless of number of suppliers, expected manufacturer profit is higher under RFQ. Posting a bid is more likely to benefit the manufacturer when the new component is from a more established industry with a high degree of awareness among candidate suppliers.     

Supplier switching decisions

In order to maximize profit, a buying firm should continuously search for and access sources which offer more favorable prices. While the literature is replete with works on the formation and development of buyer–supplier relationships, there is surprisingly only scarce research on the termination of such relationships and supplier switching. Using the concept of switching costs in a principal-agent framework, we at first analyze whether a firm switches the entire or a partial quantity to an alternative supplier when there is either symmetric or asymmetric information about the alternative supplier’s cost structure. Information asymmetry results in inert supplier switching decisions. Subsequently, we extend our model and take competitive reactions of the incumbent supplier and economies of scale effects into consideration. We find conditions under which ‘no’, ‘partial’ and ‘complete’ switching occurs, which depend on the buying firm’s beliefs about the alternative supplier’s unit costs, switching costs, the price offered by the incumbent supplier, and refinements of the price offered by the incumbent supplier due to competitive reactions and economies of scale. Broader implications for supplier relationship management and sourcing strategy decisions are also provided.     

Trade credit for supply chain coordination

Trade-credit is a seller’s short-term loan to the buyer, allowing the buyer to delay payment of an invoice. It has been the largest source of working capital for a majority of business-to-business firms in the United States. Numerous theories have been proposed to explain trade-credit, mainly from finance perspectives. It has also been an important issue in supply chain management. Surprisingly, most literature in supply chain management has examined the retailer’s stocking policies given a supplier’s trade-credit. This paper attempts to shed light on trade-credit from a supplier’s perspective, and presents it as a tool for supply chain coordination. Specifically, we explicitly assume firms’ financial needs for inventory. Following a Newsvendor framework, we assume that the supplier grants trade-credit and markdown allowance. Given the supplier’s offer, the retailer determines order quantity and the financing option for the inventory, either trade-credit or direct financing from a financial institution. Our result shows that the supplier’s markdown allowance alone cannot fully coordinate the supply chain if the retailer employs direct financing. Positive financing costs call for trade-credit in order to subsidize the retailer’s costs of inventory financing. Using trade-credit in addition to markdown allowance, the supplier fully coordinates the retailer’s decisions for the largest joint profit, and extracts a greater portion of the maximized joint profit.     

Customer rebates and retailer incentives in the presence of competition and price discrimination

Promotions are important tools for matching supply and demand in many industries. In the United States automotive industry, promotions are frequently offered, which may be given directly to customers (rebates) or given to dealers (incentives) to stimulate demand. We analyze the performance of customer rebate and retailer incentive promotions under competition. We study a setting with two manufacturers making simultaneous pricing and promotion decisions, and with two price-discriminating retailers as Stackelberg followers making simultaneous order quantity decisions. In the benchmark case with no promotions, we characterize the equilibria in closed form. We find that retailer incentives can be used by manufacturers to simultaneously improve each of their profits but can potentially lead to lower retailer profits. When manufacturers use customer rebates, we show that a manufacturer is able to decrease the profit of her competitor while increasing her own profit, although she is also at risk for her competitor to use rebates in a similar fashion. Unlike the monopoly case where the manufacturers are always better off with retailer incentives, customer rebates can be more profitable under some cases in the presence of competition. Using numerical examples we generate insights on the manufacturers’ preference of promotions in different market settings.     

Optimal pricing and inventory policies with reliable and random-yield suppliers: characterization and comparison

In this paper, we study the joint pricing and inventory replenishment problem for a periodic-review inventory system with random demand and dual suppliers, one of the suppliers is reliable but more expensive, the other supplier is less expensive but is unreliable with random yield. We characterize the firm’s optimal policies that simultaneously determine the optimal ordering and pricing decisions in each period over a finite planning horizon, and investigate the impacts of supply source diversification and supplier reliability on the firm and on its customers. We show that having source diversification or higher reliability of suppliers not only increases the firm’s expected profit, but also results in a lower optimal selling price, thus they benefit both the firm and its customers.     

Periodicity of pricing and marketing efforts in a distribution channel

Most research about cooperative (coop) advertising programs in channels relies on the assumption that manufacturers and retailers decide of pricing and marketing efforts simultaneously. This paper evaluates this central assumption and investigates the optimal periodicity (sequence of move) of pricing and marketing efforts (ME) decisions for a distribution channel. We develop a game theoretic model that accounts for pricing at each level of the channel, for the manufacturer’s ME mix strategies (a direct ME to consumers and coop advertising program offered to the retailer) and the retailer’s ME as well. We obtain solutions for a bilateral channel under different vertical interaction scenarios; when the channel is led by the manufacturer, the retailer or when channel members decide simultaneously of each of their marketing mix decisions (vertical Nash). We compare the effect of pricing and ME decision periodicity on outputs for each channel member. The main findings suggest that simultaneous decision-making of pricing and ME is optimal only for high enough levels of the manufacturer’s ME effects. For very highly effective marketing efforts, sequential play of pricing and ME allows channel members to implement equilibrium strategies and achieve maximum profits that would not be achieved with simultaneous decision-making. This highlights the importance of relaxing the simultaneous play assumption of pricing and ME in a distribution channel.     

The impact of cost uncertainty on the location of a distribution center

The location of a distribution center (DC) is a key consideration for the design of supply chain networks. When deciding on it, firms usually allow for transportation costs, but not supplier prices. We consider simultaneously the location of a DC and the choice of suppliers offering different, possibly random, prices for a single product. A buying firm attempts to minimize the sum of the price charged by a chosen supplier, and inbound and outbound transportation costs. No costs are incurred for switching suppliers. We first derive a closed-form optimal location for the case of a demand-populated unit line between two suppliers offering deterministic prices. We then let one of the two suppliers offer a random price. If the price follows a symmetric and unimodal distribution, the optimal location is closer to the supplier with a lower mean price. We also show the dominance of high variability: the buyer can decrease the total cost more for higher price variability for any location. The dominance result holds for normal, uniform, and gamma distributions. We propose an extended model with more than two suppliers on a plane and show that the dominance result still holds. From numerical examples for a line and a plane, we observe that an optimal location gets closer to the center of gravity of demands as the variability of any supplier’s price increases.     

Analysis of a Duopoly Supply Chain and its Application in Electricity Spot Markets

This paper studies a supply chain consisting of two suppliers and one retailer in a spot market, where the retailer uses the newsvendor solution as its purchase policy, and suppliers compete for the retailer’s purchase. Since each supplier’s bidding strategy affects the other’s profit, a game theory approach is used to identify optimal bidding strategies. We prove the existence and uniqueness of a Nash solution. It is also shown that the competition between the supplier leads to a lower market clearing price, and as a result, the retailer benefits from it. Finally, we demonstrate the applicability of the obtained results by deriving optimal bidding strategies for power generator plants in the deregulated California energy market. Supported in part by RGC (Hong Kong) Competitive Earmarked Research Grants (CUHK4167/04E and CUHK4239/03E), a Distinguished Young Investigator Grant from the National Natural Sciences Foundation of China, and a grant from Hundred Talents Program of the Chinese Academy of Sciences.     

Pricing and advertisement in a manufacturer–retailer supply chain

We use a game theoretical approach to study pricing and advertisement decisions in a manufacturer–retailer supply chain when price discounts are offered by both the manufacturer and retailer. When the manufacturer is the leader of the game, we obtained Stackelberg equilibrium with manufacturer’s local allowance, national brand name investment, manufacturer’s preferred price discount, retailer’s price discount, and local advertising expense. For the special case of two-stage equilibrium when the manufacturer’s price discount is exogenous, we found that the retailer is willing to increase local advertising expense if the manufacturer increases local advertising allowance and provides deeper price discount, or if the manufacturer decreases its brand name investment. When both the manufacturer and retailer have power, Nash equilibrium in a competition game is obtained. The comparison between the Nash equilibrium and Stackelberg equilibrium shows that the manufacturer always prefers Stackelberg equilibrium, but there is no definitive conclusion for the retailer. The bargaining power can be used to determine the profit sharing between the manufacturer and the retailer. Once the profit sharing is determined, we suggest a simple contract to help the manufacturer and retailer obtain their desired profit sharing.     

Optimal promotion planning—depth and frequency—for a two-stage supply chain under Markov switching demand

In considering the retailer–supplier supply chain, this paper analyzes how a retailer reasonably decides both the depth and frequency of the price discount promotion including or excluding a supplier’s inventory decision. Assuming that the promotion frequency used by the retailer is probabilistic, we model a promotion-inventory decision under an AR(1) demand with a Markov switching promotion regime. After obtaining the optimal promotion plan, our analysis also considers the behavior of the optimal promotion decision; the retailer’s price format selection, either an Every-Day-Low-Price policy (EDLP) or a Promotion policy (HiLo); and the impact of information sharing of promotion status on the system’s performance. Our results suggest that a retailer tends to overpromote if inventory cost is excluded in its promotion decision, that increasing the market share is a preferable action for both the retailer and the supplier, that total margin and price-elasticity play an important role in selecting the price format, and that the profitability for a supplier of sharing promotion information depends on the transition probabilities of the Markov switching regime.     

Single-supplier/multiple-buyer supply chain coordination: Incorporating buyers’ expectations under vertical information sharing

We address the coordination problem in a single-supplier/multiple-buyer supply chain. The supplier wishes to coordinate the supply chain by offering quantity discounts. To obtain their complete cost information, the supplier exchanges his own cost parameters with buyers leading to vertical information sharing. The supplier thinks that the buyers, as they have access to supplier’s setup and holding cost information, may demand a portion of the anticipated coordination savings based on the partial information they hold about the cost structure of the entire supply chain. We model each buyer’s expectations based on her limited view of the entire supply chain which consists of herself and the supplier only. These expectations are then incorporated into the modeling of the supply chain, which results in a generalization of the traditional Stackelberg type models. We discuss alternative efficiency sharing mechanisms, and propose methods to design the associated discount schemes that take buyers’ expectations into account. In designing the discount schemes, we consider both price discriminatory and non-price discriminatory approaches. The study adds to the existing body of work by incorporating buyers’ expectations into a constrained Stackelberg structure, and by achieving coordination without forcing buyers to explicitly comply with the supplier’s replenishment period in choosing their order quantities. The numerical analysis of the coordination efficiency and allocation of the net savings of the proposed discount schemes shows that the supplier is still able to coordinate the supply chain with high efficiency levels, and retain a significant portion of the net savings.     

Effects of sourcing structure on performance in a multiple-product assemble-to-order supply chain

This paper addresses the strategic pricing decisions of a decentralized assemble-to-order system, and the effects of sourcing structure on system performance. We consider an assemble-to-order system consisting of two substitute products and three components manufactured by different suppliers. Demand for the products is price-sensitive. The selling prices for the products are jointly determined by firms in the system. We study the system under both centralized and decentralized decision-making situations. For the centralized system, we demonstrate that there exists a unique optimal pricing solution. For the decentralized system, we show that there exists a unique Nash equilibrium in the players’ pricing game. We further analyze the effects of different sourcing structures on the system performance and the assembler’s performance. We find that reduction of suppliers in the system does not guarantee improvement of system performance. Different sourcing structures have different impacts on performance. When the two dedicated components are sourced from a single supplier and the common component is sourced from another independent supplier, the system and the assembler’s performance become worse. We show that the decentralized system can be effectively coordinated and the system performance can be improved with a simple profit-sharing contract. Finally, we provide comprehensive numerical examples to demonstrate some important managerial insights.