Supplier Involvement and Contract Design During New Product Development

Abstract

Early supplier involvement (ESI) infuses upfront supplier resources and expertise to accelerate the research and development (R&D) timeline, and allow for risk sharing. Successful implementation of ESI in a new product development setting, however, remains elusive due to the intricacy of interfirm collaboration while dealing with unproven technology and market uncertainty. Extending from prior ESI studies on supplier selection, resource integration, and relationship management, we propose game theoretical contracting strategies to achieve manufacturer objectives, such as predictable design timelines, sufficient supplier commitment, and radical in-process innovations. Taking into account various project factors, such as revenue forecast, technical uncertainty, market competition, and team capability, we propose an incentive compatible mechanism based on real option analysis to suggest which project stage to best engage the supplier. The supplier, in turn, can follow our analysis to determine whether to participate, and if so, the appropriate level of resource commitment. The equilibrium analysis provides managerial insights into how to best balance the time-to-market mandate with the need for accruing significant innovations through supply chain partnerships.