Improving Reliability of a Shared Supplier with Competition and Spillovers

European Journal of Operations Research, Volume 236, Issue 2, 16 July 2014, Pages 499-510

42 Pages Posted: 29 Mar 2024

See all articles by Yimin Wang

Yimin Wang

Arizona State University (ASU)

Yixuan Xiao

Washington State University

Nan Yang

University of Miami - Department of Management

Date Written: July 16, 2014

Abstract

Supplier reliability is a key determinant of a manufacturer’s competitiveness. It reflects a supplier’s capability of order fulfillment, which can be measured by the percentage of order quantity delivered in a given time window. A perfectly reliable supplier delivers an amount equal to the order placed by its customer, while an unreliable supplier may deliver an amount less than the amount ordered. Therefore, when suppliers are unreliable, manufacturers often have incentives to help suppliers improve delivery reliability. Suppliers, however, often work with multiple manufacturers and the benefit of enhanced reliability may spill over to competing manufacturers. In this study, we explore how potential spillover influences manufacturers’ incentives to improve supplier’s reliability. We consider two manufacturers that compete with imperfectly substitutable products on Type I service level (i.e., in-stock probability). The manufacturers share a common supplier who, due to variations in production quality or yield, is unreliable. Manufacturers may exert efforts to improve the supplier’s reliability in the sense that the delivered quantity is stochastically larger after improvement. We develop a two-stage model that encompasses supplier improvement, uncertain supply and random demand in a competitive setting. In this complex model, we characterize the manufacturers’ equilibrium in-stock probability. Moreover, we characterize sufficient conditions for the existence of the equilibrium of the manufacturers’ improvement efforts. Finally, we numerically test the impact of market characteristics on the manufacturers’ equilibrium improvement efforts. We find that a manufacturer’s equilibrium improvement effort usually declines in market competition, market uncertainty or spillover effect, although its expected equilibrium profit typically increases in spillover effect.

Keywords: Supply chain management, Game theory, Reliability, Spillover, Supplier improvement

Suggested Citation

Wang, Yimin and Xiao, Yixuan and Yang, Nan, Improving Reliability of a Shared Supplier with Competition and Spillovers (July 16, 2014). European Journal of Operations Research, Volume 236, Issue 2, 16 July 2014, Pages 499-510, Available at SSRN: https://ssrn.com/abstract=4743118 or http://dx.doi.org/10.2139/ssrn.4743118

Yimin Wang (Contact Author)

Arizona State University (ASU)

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Yixuan Xiao

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Nan Yang

University of Miami - Department of Management ( email )

United States
305-284-4574 (Phone)

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