A Capacity Cost-Sharing Contract for a Two-Stage Supply Chain with a Risk-Averse Supplier under a Bargaining Power

Abstract

This study considers a two-stage supply chain (SC) consisting of a single supplier and a manufacturer. When the manufacturer introduces a new product to the market, both the manufacturer and supplier should install production capacity in advance. Since capacity building often takes a long time, the demand is uncertain at the time of capacity decision making. The supplier often makes a conservative decision on capacity building to avoid possible capital risks due to excess capacity, which leads to the so-called double marginalization problem. Various risk-sharing supply contracts have recently been studied in academia to overcome the double marginalization problem. However, most existing studies ignore the bargaining power of each SC member and capacity investment. This study aims to fill the research gap by including capacity investment and bargaining power in the supply contract process. A capacity cost-sharing (CCS) contract is introduced in which the manufacturer shares the supplier’s capacity investment risk. We investigate how to set the contract parameters in the CCS contract to coordinate the supply chain. It is found that the wholesale price and manufacturer’s CCS ratio are negatively proportional to each other, and the manufacturer’s expected profit increases as the CCS ratio (wholesale price) increases (decreases) in the coordinated CCS contract. We show that there exists a CCS contract leading to a coordinated supply chain for a specific range of bargaining power. We also present a new CCS contract for a supply chain with a risk-averse supplier. A numerical illustration is provided to clarify how the contract parameters are determined and to examine the effect of the contract parameters on SC performance. Managerial implications and possible future work are discussed.

Coordinated Supply Contracts for a Two-Echelon Supply Chain under Given Bargaining Powers

“…They investigated how bargaining power affects the efficiency of SC coordination mechanisms and found an inverse U-shape relationship between buyers' bargaining power and technology improvement investment. Koo [21] examined the effect of bargaining power in setting the contract parameters in a CCS contract in a supplier-manufacturer supply chain environment. The author showed that channel-coordinated CCS contracts are feasible only within a specific range of bargaining power when capacity investment is required for both the supplier and the manufacturer.…”

“…The author showed that channel-coordinated CCS contracts are feasible only within a specific range of bargaining power when capacity investment is required for both the supplier and the manufacturer. This study builds upon the existing research [21] to explore approaches for designing supply contracts under all possible bargaining power scenarios.…”

“…In the centralized system, a decision maker aims to maximize the expected systemwide profit. (Refer to [21] for a more detailed description). When there is a realized demand x, the sales amount can be expressed as min(x, K sc ).…”

“…In this contract, the manufacturer shares the investment risk of the supplier by paying a fraction of the supplier's capacity cost. The CCS contract model is adopted from [21]. The CCS contract contains two parameters, Ø (the supplier's revenue share fraction) and θ (a fraction of the supplier's capacity cost for which the supplier is responsible).…”

Decision Making in Green Supply Chain with Manufacturers’ Misreporting Behavior

“…Many scholars have studied the coordination of dual-channel supply chain, which is the second stream related to dual-channel supply. Different types of contracts have been adopted by scholars, such as two-part tariff contract [22,34,[38][39][40], revenue-sharing contract [41][42][43][44], cost-sharing contract [45][46][47][48] and buyback contracts [49]. All these studies are based on symmetrical information in the supply chain.…”