A Decentralized Assembly System with Component Suppliers of Different Bargaining Power

29 Pages Posted: 14 Aug 2018

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

We analyze a decentralized assembly system with two types of component suppliers: one (commanding suppliers) has strong bargaining power who demands a wholesale price contract and the other (subordinate suppliers) has weak bargaining power who accepts a revenue sharing contract from the assembler. We derive the optimal contracts for both supplier types and study the impact of how the supplier type and the associated component costs can affect the optimal contract parameters. We demonstrate the effect of the bargaining power of the players on their relative profitability in the decentralized assembly system. We further illustrate the impact of component cost reduction and supply base reduction on the profitability of the assembler and component suppliers in the system. Specifically, our results suggest that it would be most beneficial for the assembler to prioritize improvement effort on subordinate suppliers with largest potential amount of component cost reduction. We also provide specific operating conditions under which the assembler can benefit from supply base reduction.

Keywords: decentralized assembly systems; component procurement; supply base reduction; supplier consolidation; bargaining and negotiation

Suggested Citation

Liu, Shaoxuan and So, Kut C. and Zhao, Wenhui, A Decentralized Assembly System with Component Suppliers of Different Bargaining 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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