Component procurement strategies in decentralized assembly systems under supply uncertainty

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 rst o ers 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 nal product. We rst 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 o ered by the assembler and the corresponding equilibrium production quantities of the component suppliers. . IntroductionSourcing components from a complex global supplier network can lead to a high degree of uncertainty in the supply process. Various supply chain glitches such as unexpected supply disruptions, insu cient supplier capacity, or transportation delays across borders can cause unexpected shortfalls in the required components and halt the assembly of the nal products. At the same time, long procurement lead times in a global supply network make it di cult and expensive to deal with such component shortfalls using emergency orders. Consequently, rms need to e ectively manage supply uncertainty in their component procurement decisions to avoid such potential component shortfalls. This is especially critical for products with rapidly changing technology or short life cycle such as electronic products, as it is expensive to keep safety stock of components due to high obsolescence costs.In this article we analyze the interactions among the assembler and component suppliers in their procurement decisions under a Vendor-Managed Inventory (VMI) contract. Specifically, we assume that the assembler needs to procure two required components from two independent suppliers to assemble the nal product. Under the VMI contract, the assembler rst o ers a unit price for each component and will pay component suppliers only for the amounts used to meet the actual demand. Based on the unit component prices o ered by the assembler, the two independent component suppliers then decide on the production quantities of their individual components and ship the components to the assembler before the actual demand is realized. Here, we assume that the production CONTACT Kut C. So rso@uci.edu Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/uiie. and/or transportation lead times are long,...

Coordination for pull and push contracts in decentralized system with uncertain supply

“…Gurnani and Gerchak [19] consider an assembler that procures components from two suppliers, and investigate the assembler's order decision and two suppliers' production decisions in the presence of random component yields. Pan and So [30] and Li et al [26] analyse the interactions among the assembler and suppliers in their procurement decisions in a random yield production system. He et al [20] study the impacts of decision sequences on a random yield supply chain with a service level constraint.…”

“…Fang et al [7] study a push assembly system with multiple suppliers, simultaneous supplier contracts, and a wholesale price contract. Pan and So [30] make pricing and production decisions in an assembly system with uncertain supply under a pull contract. Other factors are also considered in the literatures related to pull and push contracts, such as the presence of an outside market [14], the impact of a hybrid push-pull contract [16], a supply chain risk-averse attitude [41], and different lead times for products [42].…”

“…In this paper, we focus on the uncertain supply problem in a supplier-retailer supply chain with different market dominance, which is depicted by bargaining power through the well-known pull and push contracts. Supply uncertainty is a concerned problem in both the industrial and academic worlds [18,19,30,36,40] and can be caused by a number of reasons, such as supply disruptions due to bad weather, natural disasters, suppliers going out of business, yield uncertainty due to product defects or batch processes in which only a certain percentage of the yield is usable or lead time uncertainty which results from stock-outs at the supplier or manufacturer or due to transit delays [35]. In this paper, we mainly focus on random production yields to investigate how supply uncertainty influences the supply chain members' decisions.…”

Component Procurement for an Assembly Supply Chain with Random Capacities and Random Demand

“…(), and Pan and So () explore the inventory/production/pricing decisions for a centralized assembly system subject to random supply yields. A few papers also study contracting issues in a decentralized assembly system with random yields; see, e.g., Gurnani and Gerchak (), Güler and Bilgiç (), and Pan and So ().…”

Inventory and Production Dynamics in a Discrete-Time Vendor-Managed Inventory Supply Chain System

“…However, Mishra and Raghunathan [40] found that VMI intensifies the competition among manufacturers of competing brands, thus providing benefits to retailers. Pan and So [41] analyzed the interaction among the assembler and two component suppliers under a VMI contract. One supplier 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.…”