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.

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.