Abstract
When a new product is developed and introduced in markets, production capacity should be invested before mass production is initiated. Capacity building is often capital intensive and requires a long lead time. This paper addresses a supply contract problem for capacity investment in a two-echelon supply chain consisting of a component supplier and a final-product manufacturer. Since the demand is uncertain at the time of capacity decision-making, the supplier often builds the capacity in a conservative way to prevent possible capital losses due to excess capacity. A possible solution to this under-capacity building problem is that the manufacturer shares the investment risk with the supplier. In this paper, a capacity cost-sharing contract is introduced, and the contract parameters are examined. The attitude of suppliers to risk is discussed, and a new contract procedure is presented for a supply chain with a risk-averse supplier. With a numerical example, the effect of the contract parameters on system performance is investigated.
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More From: Journal of the Korean Institute of Industrial Engineers
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