Copyright © 2005 Elsevier B.V. All rights reserved.
Decision Support
Supplier–manufacturer coordination in capacitated two-stage supply chains
Received 10 March 2003;
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Abstract
Manufacture-to-order is an increasingly popular strategy in commodity electronics and other similar markets where many different product configurations can be produced from common components. To succeed in this environment, manufacturers need to keep both cost and order fulfillment time low. In this article, we compare three different mechanisms that a manufacturer, whose revenues depend on order delays, may use to affect its component supplier’s inventory decisions. These mechanisms are specifying components inventory level, offering a share of the earned revenues to the supplier (called simple revenue sharing), and offering a two-part revenue-sharing scheme. We show that whereas the first two approaches do not lead to supply chain coordination, the two-part scheme does. We demonstrate with numerical experiments that up to a point, the component supplier benefits from having a high utilization of its production facility, whereas the manufacturer benefits from having excess production capacity.
Keywords: Game theory; Inventory; Supply chain coordination; Incentives; Production economics
Article Outline
- 1. Introduction
- 2. Literature review
- 3. The model
- 4. The two-player decentralized model
- 4.1. The fixed-markup contract
- 4.2. The simple revenue-sharing contract
- 4.3. The two-part revenue-sharing contract
- 5. Examples
- 6. The quoted lead time and lost sales models
- 7. Further generalizations
- Acknowledgements
- Appendix A. The ProductLog function
- Appendix B. The Optimality of b0,L
- Appendix C. Concavity of z2,L
- Appendix D. Proof of bd,L < b0,L
- References






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are used to indicate that the corresponding increase or decrease can be shown analytically. Symbols ↑ and ↓ are used when the corresponding effect is seen in numerical examples, but we have not been able to prove it through mathematical arguments. When both up and down arrows are used, it means that the effect is not monotonic. Finally, “—” is used when a parameter does not affect the performance measure.