Supply Chain Contract Design under Customer In-House Capacity Considerations
Date Issued
2011
Date
2011
Author(s)
Lin, You-May
Abstract
This research studies contract design problems in a two-echelon supply chain This research studies contract design problems in a two-echelon supply chain under demand uncertainties and downstream retailer in-house capacity considerations.
Without in-house capacity, the retailer relies only on the supplier for fulfilling market demand. After building in-house capacity, the retailer uses external capacity only when in-house capacity is insufficient. Owing to this situation, the risk of uncertain demand would be reallocated between the supplier and retailer; the variances of the capacity utilization would be unfair to supplier because downstream retailer utilizes the power of allocating the demand orders.
This research takes the supplier’s point of view and assumes the supplier has higher market power to lead the contract negotiation. The objective is to modify a supply chain contract, which defines pricing and cooperation mode between the supplier and the retailer, to address the problem of supplier’s capacity investment risk. This research adopts two-part option contract with multiple-retailer setting which lead to the effect of risk pooling and capacity competition, hence both mechanisms bring advantage to supplier. Our results suggest that profit sharing between supplier and retailer is heavily affected by in-house capacity level of the retailer. With retailer’s reservation fee, the supplier reduces the profit variances while the capacity utilization is affected by downstream retailer.
Subjects
Supply Chain Contract
In-House Capacity
Pricing
Type
thesis
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