Impact of power structures in a subcontracting assembly system

Abstract

We investigate the impact of power structures on the production and pricing strategies in a decentralized subcontracting assembly system consisting of two suppliers (key supplier and subcontractor) and one manufacturer (assembler). The key supplier, who is also the general contractor, negotiates with the manufacturer and assigns partial component production to the subcontractor. We first identify a single power regime (SPR), in which either the key supplier or the manufacturer determines the wholesale price or the order/production quantity. Under SPR, we consider three power structures, namely, KSA, KAS, and SKA. We find that the assembly system will substantially benefit under KAS. Results show that the subcontracting mechanism between the two suppliers can increase each firm’s profit and disperse the bargaining power. Such a decentralization of powers can weaken the horizontal decentralization between the suppliers and improve the system’s performance, thereby achieving a win–win situation. Furthermore, we extend our analysis to a dual power regime (DPR), in which the key supplier or the manufacturer decides on price and quantity. We show that the proposed assembly system performs optimally under DPR. Moreover, the system will benefit if the firm that is substantially near the end market makes the centralization decision. Compared with the classical pull and push contract model, the proposed assembly system provides the best performance under DPR.