TECHNICAL NOTE—Optimal Product Pricing and Component Production Quantities for an Assembly System Under Supply Uncertainty

Pan, Wenting; So, Kut C.

doi:10.1287/opre.1100.0870

Cited by 29 publications

(27 citation statements)

References 12 publications

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“…On the other hand, both supply and demand uncertainty a ect the equilibrium production quantities of the suppliers when the product price is above the stochastic threshold price. This behavior is similar to that observed for a centralized assembly system studied by Pan and So (2010).…”

Section: Introductionsupporting

confidence: 86%

“…(i) It was shown in Pan and So (2010) that for deterministic demand,Q * 1 = D/δ * andQ * 2 = D, where δ * is solved by δ * 0 tg(t )dt = c 1 /p, when it is pro table to assemble the product. Under the decentralized system, it was shown in Proposition 1 that when it is pro table for the two suppliers to produce the components, the equilibrium production quantities are given by Q * 1 = D/k * and Q * 2 = D, where k * is solved by k * 0 tg(t )dt = c 1 /w * 1 as given in Equation (3).…”

Section: Proof Of Propositionmentioning

confidence: 99%

“…. Comparison with the centralized systemWe next compare the results here with those for the centralized system in which the assembler decides the order quantity and purchases the components from the two suppliers at unit costs c 1 and c 2 as studied in Pan and So (2010). LetQ * 1 andQ * 2 represent the optimal order quantities in the centralized system.…”

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confidence: 99%

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Component procurement strategies in decentralized assembly systems under supply uncertainty

Pan

2015

IIE Transactions

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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,...

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Section: Introductionsupporting

confidence: 86%

Section: Proof Of Propositionmentioning

confidence: 99%

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Component procurement strategies in decentralized assembly systems under supply uncertainty

Pan

2015

IIE Transactions

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“…Gerchak et al (1994) consider an assembly system with a product whose demand could be known or uncertain, perfect or imperfect in the assembly stage, and with stochastically proportional yields. Later papers started to consider the interactions among different players in the decentralized assembly system (Güler and Bilgiç, 2009;Pan and So, 2010). One notable paper is Gurnani and Gerchak (2007), which assumes that both suppliers' production yields are stochastic and they have to simultaneously determine their production inputs.…”

Section: Related Literaturementioning

confidence: 99%

The impact of decision timing on the suppliers’ interactions: simultaneous moves versus sequential moves

Guan

Mukhopadhyay

2016

Journal of the Operational Research Society

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The last few decades have witnessed a huge growth of outsourcing in industry where the downstream firm assigns its production tasks to different upstream suppliers. This makes the supply chain structure more complicated and gives rise to some relevant operational questions. This paper focuses on a supply chain structure that consists of one assembler and two suppliers, and both suppliers' production yields are stochastic. The assembler delegates the quantity decisions to the suppliers, and the two suppliers choose their production quantities either simultaneously or sequentially. We compare the suppliers' equilibrium production strategies under these two scenarios. Our results show that the decision sequence can exert significant influences on the firm's and channel's equilibrium payoffs. At any given wholesale price, both suppliers produce more components under sequential moves than under simultaneous moves, and this results in higher payoffs for the suppliers, the assembler and the entire supply chain. The supplier's profit increases if he can make the decision later under sequential moves. From the channel's perspective, it is more beneficial for the supplier with a higher production cost to make the decision first. The assembler is able to extract more surplus by endogenously setting the wholesale price. However, this may make the suppliers worse off under sequential moves than under simultaneous moves.

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“…To begin with, random yield frequently exists in the acquisition of some critical components, therefore, it is difficult to coordinate the production of random yield components and the others (Gurnani, Akella, and Lehoczky 2000;Inderfurth and Vogelgesang 2013;Pan and So 2010;Xu 2010). Moreover, the manufacturer who locates in a relatively upstream position of the supply chain faces larger demand fluctuations due to the bullwhip effect, therefore, the cooperation arrangement between the manufacturer and the downstream distributor has a significant impact on the supply chain performance (Lee, Padmanabhan, and Whang 1997;Wang 2009).…”

Section: Introductionmentioning

confidence: 99%

The role of spot market in a decentralised supply chain under random yield

Yin

Guan

2013

International Journal of Production Research

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We consider a decentralised supply chain with demand uncertainty, wherein a manufacturer sells a single product that consists of two components to the end consumer through an independent distributor. Assume that one component has a random yield, the manufacturer may rely on the spot market to replenish any shortage components after the random yield is realised. We identify the optimal product order, component production and replenishment decisions under two different situations. One is the traditional arrangement that the distributor decides the product procurement quantity and the manufacturer chooses the production quantity. The other is vendor-managed inventory (VMI) arrangement in which the manufacturer is responsible for both the order and the production decisions. The results show that the role of spot market can effectively offset the negative effects from production yield's, market demand's and component spot price's variances. Consequently, the spot market leads to the cooperation between the manufacturer and the distributor, and improves the channel's overall performance, in particular under the VMI arrangement when the wholesale price is sufficiently high.

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TECHNICAL NOTE—Optimal Product Pricing and Component Production Quantities for an Assembly System Under Supply Uncertainty

Cited by 29 publications

References 12 publications

Component procurement strategies in decentralized assembly systems under supply uncertainty

Component procurement strategies in decentralized assembly systems under supply uncertainty

The impact of decision timing on the suppliers’ interactions: simultaneous moves versus sequential moves

The role of spot market in a decentralised supply chain under random yield

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