Sub-Supplier's Decision Affect Supply Chain Performance

Abstract

This paper studies how transfer pricing schemes interact with sub suppliers' opportunistic behaviors to affect supply chain performance. Effective supply chain management requires careful consideration of sub-suppliers', especially with respect to transfer pricing issues. Firms increasingly approach their sub-suppliers to drive compliance with firms' defined transfer pricing schemes. The paper models the supply chain incorporating asymmetric information among all the parties, supplier's innovation activities, sub suppliers' corruption possibility, and transfer pricing schemes. It examines the impact of various transfer pricing schemes on supply chain efficiency. Specifically, it conducts a performance comparison between the variable-cost transfer pricing scheme and the full-cost transfer pricing scheme. The paper finds that the sub supplier's choice of a transfer pricing scheme affects the supplier's sourcing decisions and the supply chain performance, and the variable-cost transfer pricing scheme performs better in achieving supply chain coordination. Therefore, the present research seeks to explore and increase one's understanding of critical factors that contribute to overcome aforementioned complexities and unique challenges of managing sub-suppliers for transfer pricing schemes. The present research expands on the theory of transfer pricing schemes and sub-supplier management context.