Direct Supply Base Reduction in a Decentralized Assembly System with Suppliers of Varying Market Power

38 Pages Posted: 14 Aug 2018 Last revised: 23 Aug 2021

See all articles by Shaoxuan Liu

Shaoxuan Liu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Kut C. So

University of California, Irvine - Paul Merage School of Business

Wenhui Zhao

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: July 27, 2018

Abstract

This paper studies a decentralized assembly system with two types of independent component suppliers:\ one type, so-called commanding suppliers, has strong market power and sets the component price in a push contract offered to the assembler; the other type, subordinate suppliers, has weak market power and accepts a pull contract with the component price set by the assembler.\ We analyze how direct supply base reduction of component suppliers through supplier clustering can affect the profitability of the assembler and the component suppliers, and we show that direct supply base reduction through clustering of commanding suppliers is generally beneficial to the assembler. Direct supply base reduction through clustering of subordinate suppliers also benefits the assembler except when the clustering would add another commanding supplier to the system. In that case, our numerical results show that such clustering would likely improve the assembler's profitability when a product's profit margin is low and when clustering yields a reduction in the assembler's coordination costs.\ We also give sufficient conditions under which direct supply base reduction through supplier clustering benefits also the suppliers involved in the clustering.

Keywords: decentralized assembly systems; supply base reduction; supplier clustering; supplier power structure; supply contracts

Suggested Citation

Liu, Shaoxuan and So, Kut C. and Zhao, Wenhui, Direct Supply Base Reduction in a Decentralized Assembly System with Suppliers of Varying Market Power (July 27, 2018). Available at SSRN: https://ssrn.com/abstract=3221091 or http://dx.doi.org/10.2139/ssrn.3221091

Shaoxuan Liu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

1954 Huashan Rd.
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

Kut C. So (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Wenhui Zhao

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai, Shanghai 200030
China

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