The Contract Design for a Supply Chain with Potential Scarce Components

A variety types of contracts are applied in current business market. Much work has been done on contracts studying the negative relationship between price and quantity, while little has considered the positive and negative relationship together. This article investigates the contracts for potential scarce components with two charging schemes. A scarce component occurs in supply or demand disruption, with the price and total ordering quantity positively correlated. Otherwise, the components we call non-scarce components, with the price and total ordering quantity negatively correlated. A potential scarce component is the component may be scarce in the future but no one can predict when the component will become scarce. This research applies the concept of the Stackelberg-type model with or without Cournot competition to construct a two-tier supply chain model. The upstream supplier acting as the leader decides the contract of potential scarce components. Then the downstream manufacturers, being informed of contract information and market situations, places an order of the components. We analytically show that our contract can be applied to the potential scarce components with the probability of the supply disrupted. The strategies for the supplier are provided to compare its profits and decisions under the concern of the supply chain disruption. Some characteristics of the equilibrium decisions and managerial insights are suggested for the supplier.