Impact of Supply Chain Contracts on Incentives for Lead Time Reduction

44 Pages Posted: 19 Sep 2007

See all articles by Santiago Kraiselburd

Santiago Kraiselburd

MIT Zaragoza International Logistics Program; INCAE Business School

Ananth Raman

Harvard University - Technology & Operations Management Unit

Date Written: February 20, 2006

Abstract

We show that in supply chains where retailer effort can substantially affect sales, longer lead times can result in higher sales for the manufacturer. Hence, manufacturers might not want to reduce lead times even if it was free or inexpensive to do so. Using a one-period model where retailer effort affects sales and is exerted after stocking quantities are determined, manufacturers and retailers have a price-only contract, lead time from the manufacturer to retailer could be reduced to zero at no additional cost (i.e. there were no capacity constraints, and there was no added per unit cost of producing with short lead times), and there is no competition (i.e., the retailer and manufacturer have exclusive contracts), we still find conditions under which manufacturers are better off sticking to longer lead times. Our paper highlights how supply chain contracts could act as a potential barrier to reducing lead times.

Keywords: Newsvendor, contracts, incentives, lead time, retailer effort

JEL Classification: D24, E23, J4, L82

Suggested Citation

Kraiselburd, Santiago and Raman, Ananth, Impact of Supply Chain Contracts on Incentives for Lead Time Reduction (February 20, 2006). Instituto de Empresa Business School Working Paper No. WP06-17. Available at SSRN: https://ssrn.com/abstract=1015568 or http://dx.doi.org/10.2139/ssrn.1015568

Santiago Kraiselburd (Contact Author)

MIT Zaragoza International Logistics Program ( email )

Avenida Gomez Laguna 25
Zaragoza, 50009
Spain

INCAE Business School

Alajuela
Costa Rica

HOME PAGE: http://www.incae.edu

Ananth Raman

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States
617-495-6937 (Phone)
617-496-4059 (Fax)

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