Three strategies for engaging a buyer in supplier development efforts

Abstract

The effectiveness of supplier development programs has resulted in a wide range of applications in various industries. By emphasizing on cooperative efforts of suppliers and buyers, these programs can significantly improve the suppliers' performance. This leads the suppliers to develop different strategies that increase the involvement of their buyers. In this study, we identify three strategies that a supplier can implement to facilitate the supplier development effort of its buyer: (1) wholesale price manipulation, (2) paying a share of investment, and (3) controlling the investment. We analyze the implementation of these strategies under uncertainties of supply and demand to expand the applicability of the models and results. In this study, we show that the optimal decisions of the players under all three strategies are unique. Our findings also indicate that the effectiveness of these strategies decreases as the profit margin of the buyer increases. In addition, we explore the effect of profit margins and demand uncertainty on the players' optimal decisions. Through numerical analysis, we indicate that for low buyer's and supplier's profit margins, the supplier prefers wholesale price manipulation strategy. On the other hand, when the profit margin of the supplier is relatively high, paying a share of investment strategy is more attractive. Moreover, our results demonstrate that uncertainties of supply and demand may have contradictory effects on players' optimal decisions.