Supplier development strategy considering technical uncertainty

Abstract

Previous literature on supplier development was mostly based on the assumption that investments are bound to succeed, with little consideration given to the impact of technological uncertainty on supplier development strategies. We examine a supply chain structure consisting of two suppliers (Suppliers 1 and 2) and one manufacturer, considering the technical uncertainty when the manufacturer implements supplier development to reduce production costs. We use the success rate of technological investment to measure technological uncertainty and considers the varying levels of different strategies. Research shows that (1) more intense competition may benefit both the manufacturer and suppliers, but a higher success rate of technology investment may hurt suppliers' profit when the manufacturer participates in developing investment. Furthermore, (2) regardless of the level of technological uncertainty, the manufacturer sets a higher profit margin if he participates in developing investment, which makes suppliers lower their wholesale prices. Then, (3) the manufacturer always participates in developing investment activity. Whether to invest in one or two suppliers depends on the manufacturer's development capability and the relative success rate of technology investment. When the manufacturer's development capacity is weak, the manufacturer should invest in the two suppliers, which can be strengthened when the success rates of investing in one supplier and two suppliers are close. Last, (4) Supplier 1 always prefers the strategy where the manufacturer invests in two suppliers simultaneously but the preference of Supplier 2 relies on the manufacturer's development capacity, the production cost, and the potential market.