Coordinating a Supply Chain When Manufacturer Makes Cost Reduction Investment in Supplier

Abstract

We consider a supply chain consisting of an upstream supplier and a downstream manufacturer, in which the supplier provides a component to the manufacturer, facing a price-sensitive and uncertain demand. The manufacturer makes cost reduction investment in the supplier to improve the supplier’s production efficiency, which benefits the entire supply chain. We derive the optimal investment and operating decisions. Both the centralized and decentralized supply chains are studied. We show that the optimal investment and operating decisions in the decentralized setting may deviate from that in the centralized setting. To avoid the profit loss caused by such a deviation, we develop a coordination mechanism by introducing a combined policy of revenue-sharing policy and investment cost-sharing policy. We also show that the developed coordination mechanism can achieve Pareto improvement for the two players.

Manufacturer’s R&D Investment Strategy and Pricing Decisions in a Decentralized Supply Chain

“…The other stream of literature is on cost reduction investment in supply chains. For example, Iyer et al [11], Ge et al [12], and Huang et al [13] consider the problem of cost reduction investment in a supply chain with one upstream supplier and one downstream manufacturer. Bernstein et al [14] explore the problem of cost reduction investment in a supply chain consisting of multiple suppliers and one manufacturer.…”