The effect of delivery deviations on the choice of a supplier and the supply-chain equilibrium

Abstract

• Considering the effect of competition between a firm and its potential suppliers. • The demand for products and the delivery lead time are stochastic. • A risk-sharing mechanism is implemented via compensation payments. • Choosing the best supplier along with equilibrium delivery lead time accuracies. • Information asymmetry may be more profitable for both supply-chain parties. We consider the effect of competition between a firm and its potential suppliers on their decisions, including the firm's decision regarding which supplier to choose. The supply-chain parties interact via a wholesale-price contract with risk sharing via compensation payments paid by the supplier to the firm for early/late supplies. Both the demand for products and the delivery lead time are stochastic. We use Nash and Stackelberg scenarios to model the competition with a game theoretic approach depending on the level of information available to the supply-chain parties. The firm determines the order quantity and the planned delivery time, whereas the supplier controls the accuracy of the delivery times. We show the supplier's leadership has no effect on the supply-chain equilibrium only if the system conditions are such that the demand is known and an order should be placed as soon as possible. Unexpectedly, the Stackelberg solution, and therefore information asymmetry, may be more profitable for both supply-chain parties; that is, it may be Pareto-improving. We also find that by agreeing to greater compensation for early and late deliveries, the supplier may increase its expected profit, as well as the profit of the entire supply chain, thereby coordinating it.