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Component procurement strategies in decentralized assembly systems under supply uncertainty

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  • Wenting Pan
  • Kut C. So

Abstract

In this article we analyze the interactions among the assembler and two component suppliers in their procurement decisions under a Vendor-Managed Inventory (VMI) contract. Under the VMI contract, the assembler first offers a unit price for each component and will pay component suppliers only for the amounts used to meet the actual demand. The two independent component suppliers then decide on the production quantities of their individual components before the actual demand is realized. We assume that one of the component suppliers has uncertainty in the supply process, in which the actual number of components available for assembly is equal to a random fraction of the production quantity. Under the assembly structure, both component suppliers need to take into account the underlying supply uncertainty in deciding their individual production quantities, as both components are required for the assembly of the final product. We first analyze the special case under deterministic demand and then extend our analysis to the general case under stochastic demand. We derive the optimal component prices offered by the assembler and the corresponding equilibrium production quantities of the component suppliers.

Suggested Citation

  • Wenting Pan & Kut C. So, 2016. "Component procurement strategies in decentralized assembly systems under supply uncertainty," IISE Transactions, Taylor & Francis Journals, vol. 48(3), pages 267-282, March.
    • Handle: RePEc:taf:uiiexx:v:48:y:2016:i:3:p:267-282
    DOI: 10.1080/0740817X.2015.1063793
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    Cited by:

    1. Li, Tingting & Chen, Junlin, 2020. "Alliance formation in assembly systems with quality-improvement incentives," European Journal of Operational Research, Elsevier, vol. 285(3), pages 931-940.
    2. Zheng, Zhong & Chen, Zhiyuan & Savaser, Sinem Kinay, 2021. "The implications of contract timing on a supply chain with random yield," International Journal of Production Economics, Elsevier, vol. 240(C).
    3. Pan, Wenting & So, Kut C. & Xiao, Guang, 2022. "Benefits of backup sourcing for components in assembly systems under supply uncertainty," European Journal of Operational Research, Elsevier, vol. 302(1), pages 158-171.
    4. R. Rajesh, 2022. "A novel advanced grey incidence analysis for investigating the level of resilience in supply chains," Annals of Operations Research, Springer, vol. 308(1), pages 441-490, January.
    5. Xiao, Tiaojun & (Junmin) Shi, Jim, 2016. "Pricing and supply priority in a dual-channel supply chain," European Journal of Operational Research, Elsevier, vol. 254(3), pages 813-823.

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