The impact of decision timing on the suppliers’ interactions: simultaneous moves versus sequential moves

Abstract

The last few decades have witnessed a huge growth of outsourcing in industry where the downstream firm assigns its production tasks to different upstream suppliers. This makes the supply chain structure more complicated and gives rise to some relevant operational questions. This paper focuses on a supply chain structure that consists of one assembler and two suppliers, and both suppliers’ production yields are stochastic. The assembler delegates the quantity decisions to the suppliers, and the two suppliers choose their production quantities either simultaneously or sequentially. We compare the suppliers’ equilibrium production strategies under these two scenarios. Our results show that the decision sequence can exert significant influences on the firm’s and channel’s equilibrium payoffs. At any given wholesale price, both suppliers produce more components under sequential moves than under simultaneous moves, and this results in higher payoffs for the suppliers, the assembler and the entire supply chain. The supplier’s profit increases if he can make the decision later under sequential moves. From the channel’s perspective, it is more beneficial for the supplier with a higher production cost to make the decision first. The assembler is able to extract more surplus by endogenously setting the wholesale price. However, this may make the suppliers worse off under sequential moves than under simultaneous moves.