Abstract
We consider a decentralized supply chain with a downstream manufacturer and an upstream supplier. The upstream supplier sells a product to the manufacturer, who faces a quality and price sensitive demand. The supplier has a chance to invest in both cost reduction and quality improvement of its product. We derive the optimal investment and pricing decisions for the supply chain members. We do so in both the centralized and the decentralized supply chains. We show that the optimal investment and pricing decisions in the decentralized supply chain may deviate from that in the centralized supply chain. We develop a mechanism to coordinate the decentralized supply chain. The developed mechanism contains four policies: wholesale price, sharing of revenue, sharing of cost reduction investment cost, and sharing of quality improvement investment cost. We also show that the developed coordination mechanism can lead to Pareto improvement.
Highlights
Low production cost and high product quality are key components in achieving competitive advantage
(4) We develop a mechanism to coordinate the decentralized supply chain and show that the developed coordination mechanism can result in Pareto improvement
The existing studies on investments in cost reduction and quality improvement in decentralized supply chains suppose that a supply chain member either makes cost reduction investment or conducts quality improvement investment
Summary
Low production cost and high product quality are key components in achieving competitive advantage. Xu [4] considers a supply chain where the upstream firm makes quality improvement investment. Chen et al [11] study quality improvement investments in a supply chain with one upstream firm and multiple downstream firms. In a supply chain with one Mathematical Problems in Engineering upstream firm and one downstream firm, Usta et al [16] consider the downstream firm’s cost reduction investment. We characterize the optimal cost reduction and quality improvement investment strategies We consider both the centralized and the decentralized supply chains. (2) We characterize the optimal pricing decisions in both the centralized and the decentralized supply chains, under any given investment strategy.
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