Impact of Supply Chain Contracts on Incentives for Lead Time Reduction
44 Pages Posted: 19 Sep 2007
Date Written: February 20, 2006
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: Suggested Citation