Optimal-Quality Choice and Committed Delivery Time in Build-To-Order Supply Chain

Abstract

This paper studies a build-to-order supply chain (BTO-SC), which consists of one contract manufacturer (CM) and one original equipment manufacturer (OEM). The CM commits to the delivery time and the OEM determines the quality level and the selling price of the supply chain product. We present a three-stage Stackelberg game model and identify a Nash equilibrium solution for the decisions of the CM and the OEM. We conduct a sensitivity analysis to provide insights into the roles of the CM and the OEM. Our main research findings are as follows: The CM’s profit increases while the OEM’s profit first decreases and then increases (non-monotonic) as the committed delivery time sensitivity of demand increases. Interestingly, this study finds that the OEM’s profit decreases, whereas the CM’s profit first increases and then decreases (non-monotonic) in the unit production subsidy paid by the OEM to the CM. Our work shows that the high-quality and fast-delivery product policy is worthwhile in a quality-sensitive or delivery time-sensitive market, which leads to a triple-win outcome. Counterintuitively, a high production capacity is not always advantageous for the supply chain product, even for the CM.