Independence of Capacity Ordering and Financial Subsidies to Risky Suppliers
Manufacturing & Service Operations Management, published online before print February 16, 2010, DOI:10.1287/msom.1090.0284
40 Pages Posted: 28 Nov 2007 Last revised: 22 Jun 2016
Date Written: September 21, 2008
Abstract
The risk of supply disruptions due to suppliers' financial problems plays a prominent role in manufacturers' risk portfolios. Even large suppliers (e.g. Delphi) could file for bankruptcy, and manufacturer's actions, such as financial subsidies to the suppliers, affect profoundly suppliers' financial health. Using a dynamic, stochastic, periodic-review model of manufacturer's joint capacity reservation and financial subsidy decisions and a firm-value model of supplier's bankruptcy, we address the following questions: (1) How can one model the supplier's financial state and its relationship to the supplier's operational performance? (2) What are the operational benefits to the manufacturer from giving financial subsidies to the supplier, and what are the costs? (3) What is the optimal joint capacity ordering and financial subsidy policy for the manufacturer? (4) Should a powerful manufacturer share supply chain profits with a weaker supplier? We provide general conditions that allow the manufacturer to make ordering decisions independently from the subsidy decisions. In particular, to choose the optimal order quantities in the dynamic newsvendor setting, the manufacturer should use the newsvendor critical fractile expression. We provide conditions for the optimal subsidy policy to have a subsidize-up-to structure, perform comparative statics analysis, and describe conditions when the manufacturer may choose to share supply chain profits with the supplier.
Keywords: Supply Risk, Interface Between Operations and Finance, Random Capacity
JEL Classification: D24, G33, D92, L23
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Supply Disruptions, Asymmetric Information and a Backup Production Option
By Zhibin (ben) Yang, Goker Aydin, ...
-
Risk, Financing and the Optimal Number of Suppliers
By Volodymyr Babich, Goker Aydin, ...
-
Total-Cost Procurement Auctions: Should the Buyer Reveal Suppliers' Quality?
By Dimitris Kostamis, Damian R. Beil, ...
-
Decentralized Supply Risk Management
By Goker Aydin, Volodymyr Babich, ...
-
Supply Side Story: Risks, Guarantees, Competition and Information Asymmetry
By Mehmet Gumus, Saibal Ray, ...
-
Bargaining Power and Supply Base Diversification
By Zhixi Wan and Damian R. Beil
-
Manufacturers' Competition and Subsidies to Suppliers
By Adam A. Wadecki, Volodymyr Babich, ...
-
By Zhibin (ben) Yang, Goker Aydin, ...
-
By Shrutivandana Sharma, Volodymyr Babich, ...
-
Contracting with Asymmetric Demand Information in Supply Chains
By Volodymyr Babich, Hantao Li, ...