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Supplier development investment strategies: a game theoretic evaluation

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  • Chunguang Bai

    (Dongbei University of Finance and Economics)

  • Joseph Sarkis

    (Worcester Polytechnic Institute)

Abstract

Supplier development is a critical competitive endeavor for organizations and their supply chains. Investigation into this area has increased over the past few years, yet further understanding of suppler development is needed. Specifically, recent supplier development investment practices have shown a shift from standalone actions by organization or supplier to joint actions between organization and suppliers. Faced with this phenomenon, the goal of this paper is to develop a theoretic model based on the Cobb–Douglas production function. The study focuses on determining optimal supplier development investment strategies with respect to joint actions that increase supplier production capability for the benefit of both the focal organization and its suppliers. The supplier development investment strategies mainly refer to joint actions between an organization and multiple suppliers through capital resources (tangible) investments, knowledge (intangible) investments, and sharing cost of capital resources (tangible) investments. Using various game theoretic models, we reveal how supplier development investment strategies and profits of all the members are affected by various buyer-supplier relationships and investment returns to scale reasons. Whether the focal organization (buyer) has any incentives to share cost of capital resources (tangible) investments is also investigated. Our first finding is that supplier development investment activities motivation is derived from increases in supply volume for the “increasing returns to scale” situation, and derives from increasing the organization and suppliers’ marginal profit in the “decreasing returns to scale” situation. Secondly, the cooperative relationship is more economically beneficial to the supply chain, but it also requires more capital resources and knowledge expenditures (investments) than a non-cooperative relationship. Thirdly, through numerical analysis it is found that the cooperative relationship can not obtain Pareto efficiency for all the members of the supply chain when using the Nash bargaining model. Additional gaming insights and implications are also provided from parametric analysis. Opportunities for further research are also presented.

Suggested Citation

  • Chunguang Bai & Joseph Sarkis, 2016. "Supplier development investment strategies: a game theoretic evaluation," Annals of Operations Research, Springer, vol. 240(2), pages 583-615, May.
    • Handle: RePEc:spr:annopr:v:240:y:2016:i:2:d:10.1007_s10479-014-1737-9
    DOI: 10.1007/s10479-014-1737-9
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    3. Da Liu & Shou-Kai Wang & Jin-Chen Liu & Han Huang & Xing-Ping Zhang & Yi Feng & Wei-Jun Wang, 2017. "Optimum Subsidy to Promote Electric Boiler Investment to Accommodate Wind Power," Sustainability, MDPI, vol. 9(6), pages 1-11, May.
    4. Qianqian Shi & Jianbo Zhu & Qian Li, 2018. "Cooperative Evolutionary Game and Applications in Construction Supplier Tendency," Complexity, Hindawi, vol. 2018, pages 1-13, January.
    5. Ismail Abdi Changalima & Ismail Juma Ismail & Alban Dismas Mchopa, 2021. "A review of the forms, rationale, and challenges of supplier development in public procurement: lessons for public buyers in Tanzania," Future Business Journal, Springer, vol. 7(1), pages 1-10, December.
    6. Amirmohsen Golmohammadi & Alireza Tajbakhsh & Mohamed Dia & Pawoumodom M. Takouda, 2022. "Effect of timing on reliability improvement and ordering decisions in a decentralized assembly system," Annals of Operations Research, Springer, vol. 312(1), pages 159-192, May.
    7. Nayeli Hernandez-Martinez & Nevin Mutlu & Jan C. Fransoo, 2021. "Social equity in supplier–buyer relationships in smallholder agri-food supply chains," Flexible Services and Manufacturing Journal, Springer, vol. 33(4), pages 1027-1089, December.
    8. Imre Dobos & Gyöngyi Vörösmarty, 2021. "Supplier selection: comparison of DEA models with additive and reciprocal data," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 29(2), pages 447-462, June.
    9. Golmohammadi, Amirmohsen & Taghavi, Majid & Farivar, Samira & Azad, Nader, 2018. "Three strategies for engaging a buyer in supplier development efforts," International Journal of Production Economics, Elsevier, vol. 206(C), pages 1-14.
    10. Liu, Guanmei & Wang, Haijun & Shao, Xiaofeng, 2023. "Technology investments into a supplier with upstream entry," European Journal of Operational Research, Elsevier, vol. 305(1), pages 240-259.
    11. Chunguang Bai & Simonov Kusi-Sarpong & Sharfuddin Ahmed Khan & Diego Vazquez-Brust, 2021. "Sustainable buyer–supplier relationship capability development: a relational framework and visualization methodology," Annals of Operations Research, Springer, vol. 304(1), pages 1-34, September.
    12. Rongwu Lu & Xinhua Wang & Hao Yu & Dan Li, 2018. "Multiparty Evolutionary Game Model in Coal Mine Safety Management and Its Application," Complexity, Hindawi, vol. 2018, pages 1-10, March.
    13. Jamalnia, Aboozar & Gong, Yu & Govindan, Kannan & Bourlakis, Michael & Mangla, Sachin Kumar, 2023. "A decision support system for selection and risk management of sustainability governance approaches in multi-tier supply chain," International Journal of Production Economics, Elsevier, vol. 264(C).
    14. Saghiri, Soroosh & Wilding, Richard, 2021. "On the effectiveness of supplier development programs: The role of supply-side moderators," Technovation, Elsevier, vol. 103(C).

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