Supply Risk Mitigation in a Decentralized Supply Chain: Price Postponement or Payment Postponement?

Posted: 26 Mar 2020

See all articles by Xin Geng

Xin Geng

University of Miami - Department of Management

Xiaomeng Guo

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Nan Yang

University of Miami

Date Written: March 1, 2020

Abstract

In a multi-stage model of a bilateral supply chain, we study two postponement strategies that the downstream retailer may deploy to mitigate the supply yield risk originated from the upstream production process. The retailer could either postpone the procurement payment until after the yield is realized and pay only for the delivered amount, or postpone the pricing decision to better utilize the available supply, or do both. Due to the decentralized setting, the timing of the payment and pricing will have a ripple effect and generate system-wide implications on the channel performance. Taking a game theoretic approach, we formulate a Stackelberg game and solve for the equilibrium in four scenarios respectively, in which the retailer uses different combination of the aforementioned postponement strategies. There are three main findings. First, when the production cost is low and the yield loss is highly likely, the retailer never strictly benefits from either postponement strategy; otherwise, the retailer is more likely to deploy payment, rather than price, postponement. Second, we uncover a situation where postponing price and payment are strategic complements for the retailer. That is, the use of one strategy may increase the benefit of using the other. Third, we identify conditions on the production cost and the random yield distribution, under which the postponement strategies can be Pareto optimal to the entire supply chain, making the firms' profits and the consumer surplus simultaneously higher. These results can be applied in many practical settings to provide guidance to effectively mitigate supply yield risk. Specifically, they may help a firm better design the procurement contract and properly use marketing instrument (pricing) to mitigate supply risk and increase profit.

Keywords: Supply Risk, Random Production Yield, Postponement, Pricing

Suggested Citation

Geng, Xin and Guo, Xiaomeng and Xiao, Guang and Yang, Nan, Supply Risk Mitigation in a Decentralized Supply Chain: Price Postponement or Payment Postponement? (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3546872

Xin Geng (Contact Author)

University of Miami - Department of Management ( email )

United States

Xiaomeng Guo

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies ( email )

Li Ka Shing Tower
The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies ( email )

M634, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon
China

HOME PAGE: http://xiaog.weebly.com/

Nan Yang

University of Miami ( email )

United States
305-284-4574 (Phone)

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