Title: Cost-sharing contracts and efficiency in a two-stage supply chain

Authors: Mark R. Frascatore, Farzad Mahmoodi

Addresses: School of Business, Clarkson University, Potsdam, NY 13699, USA. ' School of Business, Clarkson University, Potsdam, NY 13699, USA

Abstract: This paper proposes an efficiency-enhancing contract mechanism in a two-stage supply chain. The model includes a buyer (the Original Equipment Manufacturer or OEM) who relies on a seller (the supplier) for key components. The self-interested supplier creates a level of capacity before demand is realised, but this level may not be optimal for the supply chain. Furthermore, the self-interested OEM may choose a suboptimal output price. The firms thus create a contract stipulating three factors: the OEM|s output price, a fraction of the supplier|s capacity costs to be paid by the OEM, and a fixed rebate paid from the supplier to the OEM. These factors can be chosen so that the efficient level of capacity is created, and both the supplier|s and OEM|s profits increase. Sensitivity analysis is then conducted to indicate the industry characteristics that make this type of contract most effective.

Keywords: contract manufacturing; collaborative relationships; supply contracts; optimal contracts; efficient capacity; cost-sharing; two-stage supply chains; efficiency enhancement; original equipment manufacturers; OEMs; buyers; sellers; suppliers; key components; self-interest; capacity levels; suboptimal output prices; capacity costs; fixed rebates; profits; sensitivity analysis; industry characteristics; integrated supply chains; SCM; supply chain management.

DOI: 10.1504/IJISM.2011.038330

International Journal of Integrated Supply Management, 2011 Vol.6 No.1, pp.3 - 19

Received: 24 Oct 2009
Accepted: 20 May 2010
Published online: 28 Jan 2011 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article