The Impact of Cost Information Sharing on Procurement Contract Design

Abstract

In this paper, we provides contract design mechanisms and analysis for manufacturers to manage decentralized supply chain. Suppose the manufacturer’s final product consists of components, each produced by a different supplier, and the manufacturer first purchases components from suppliers, then assembles them into final product and meet demands aftermarket realization. While supply chain’s internal cooperation always benefits both, suppliers are often reluctant to proactively share their own production cost structure, otherwise manufacturers may depress purchase prices, which may reduce supplier’s profit. Manufacturers on the other hand, prefers to be informed of true cost information in order to gain greater revenues. We takes manufacturer’s perspective and design the optimal contract menu for suppliers, both to enable suppliers to disclose private cost information and to maximize the benefits. We start by modeling the original problem and find that the original problem is a complex multidimensional optimization problem. We then examine the nature of the original problem solving and devise the solution algorithm to arrive at the optimal contract menu. This algorithm reduces the complexity of the original question from o(2 n ) to o(n). We further investigate the influence mechanism of model parameters on the results and find that when market demand increases or the selling price of the final product increases, value of private information increases significantly. However, if market demand uncertainty increases, the value of information may increase or decrease for both sides.