Towards contract based coordination of distributed product development processes with complete substitution

Abstract

In distributed product development processes system integrators collaborate with suppliers to provide marketable products. We analyze contract structures in their ability to coordinate such processes. A converging supply chain with two suppliers and one system integrator is considered. Each supplier develops one component and faces uncertainty with regard to development results. For the system integrator the specifications of both components are substitutive in terms of the specification of the final product (e.g., recycling quotas). Depending on the resulting specification of the final product, the system integrator generates revenues under a maximum price clause. We apply a game-theoretic framework: the system integrator is the Stackelberg leader and the suppliers are Stackelberg followers. Assuming uniformly distributed development results, we analyze two typical development contracts: a wholesale price contract and a penalty contract. We present numerical illustrations of centralized and decentralized solutions to gain qualitative insights about the optimal decisions and the coordination ability of the two contracts. Accordingly, both contracts coordinate the supply chain only under forced compliance.