Price-only Contract Research Articles

Evolutionary dynamics of supervision-compliance game on optimal pre-positioning strategies in relief supply chain management

Emergency supply reserves are indispensable material bases in relief supply chain management. However, limited in-kind relief resources stockpiled in government-managed depositories may fail to meet the surging demand following the disaster. This paper develops an optimal pre-positioning strategy for emergency supplies with pre-purchasing contracts between local governments (LGs) and emergency supply manufacturers (ESMs) to properly address demand uncertainty in different disaster scenarios. Physical materials and production capacity are integrated into a holistic and hybrid reserve model to mitigate overstock or stock-out risks. Applying an evolutionary game-theoretic framework, contract enforcement has been extensively analyzed to avoid LGs dereliction of duty and ESMs’ breach of contract. A novel dynamic penalty mechanism is proposed to control the fluctuations in strategy choices and effectively improve ESMs’ compliance without LGs’ excessive inputs on supervision. The numerical simulation results, along with sensitivity analyses on major cost-accounting, demand characteristics, and environmental parameters, show that safety stock is the primary guarantee in most cases, while reactive stock acts as an important supplement for disasters with long-term consequences. The joint reserve policy (except for no action strategy) outperforms the price-only contract on the total reserved quantity of emergency supplies at a lower long-term average cost. The initial state and cost-benefit structures dominate the complex interplay and periodical fluctuations in the supervision-compliance game. The doomed cycle of order, disorder, and reorder in contract performance management can be well managed under the proposed dynamic penalty mechanism, which appears much more efficient and incentive-compatible in promoting both parties to fulfill their obligations.

Gaming strategies within a green supply chain considering consumers' concern about the greenness and conformance quality of products.

With the growing demand for green development, providing green and conformance quality improved products for sustainable growth and industrial upgrading is essential. However, the related literature rarely considers the improvement of product conformance quality in green supply chain management. This paper incorporates both into a framework for addressing the problem. We analyze the optimal strategies of a manufacturer responsible for conformance quality of product and greenness improvement and a retailer responsible for product marketing in a supply chain under four contracts: full cooperation, price-only contract, two-part tariff, and marketing cost-sharing. The results show that full cooperation and two-part tariffs lead to the same and highest product quality, greenness, overall profit, and social welfare, but full cooperation is difficult to achieve in the supply chain. For the profit-maximizing manufacturer and retailer, the manufacturer most prefers two-part tariff contracts, while the retailer prefers marketing cost-sharing because both achieve the highest profit in the preferred contract. In addition, under the price-only contract, the conformance quality of product and greenness is the lowest, and the profit levels for manufacturers and retailers are the lowest. In all four cases, increased environment and quality awareness contribute to improved product greenness and conformance quality, leading to higher profits for the manufacturer and retailer and higher social welfare.

Selling to the newsvendor through debt-shared bank financing

Debt-shared bank financing, as an innovative and collaborative financing scheme, allows the supplier to (partially) share the retailer’s bank loan obligation, including principal and interest. We study the operational and financial decisions of a chain with a supplier (Stackelberg leader) selling to a capital-constrained retailer via a debt-shared contract. We derive the equilibrium debt-shared coefficient, wholesale price, order quantity and bank’s interest rate with the retailer in different wealth regions. The very poor retailer always accepts debt-sharing and earns a profit, even if the supplier sets the wholesale price up to the retail price. The medium poor retailer might enter a supplier’s debt-sharing hole (a retailer’s wealth region) and acquire zero profit, by using debt-sharing with a wholesale price up to the retail price. For the medium poor retailer outside the hole or the medium rich retailer, the supplier offers either an optimal debt-shared bank financing contract or an optimal price-only contract at her benefit, mainly depending on the production cost and the retailer’s capital. Under debt-shared bank financing, both the supplier’s profit and the chain’s efficiency improve. The retailer might overstock when the production cost is high. Computational studies show the not very rich retailer’s profit is a bowl-shaped function of his capital and the bottom is the hole. The very poor retailer might earn a larger profit than under the optimal price-only contract. The supplier’s profit is unimodal and it achieves globally optimum in the hole (at the upper bound of the hole if production cost is low).

Specific capacity investment in supply chains

In a supply chain composed of a supplier and a buyer, the supplier must make two decisions, buyer-specific capacity and cost-reduction investment for each unit of the installed specialized capacity, before demand uncertainties have been resolved. However, because capacity is not verifiable, the firms cannot commit to firm contract terms. Bearing the upfront investment cost, the supplier under-builds specific capacity and under-invests in the cost-reduction innovation, thereby lowering supply chain efficiency. A common arrangement is that the parties agree to some initial contract terms ex ante, and may renegotiate ex post. This paper investigates whether several common types of contract can induce the supplier to build specialized capacity and invest in cos-reduction innovation at the first-best levels, and how ex post renegotiation affects the results. Under quantity-only contracts, the supplier will over-invest in cost-reduction innovation but under-build specific capacity either with or without ex post renegotiation. Under price-only contracts, the supplier will under-invest in cost-reduction innovation but over-build specific capacity. Ex post renegotiation improves the channel profit and brings the supplier’s decisions closer to the firstbest, but its decisions remain suboptimal. However, there exist one quantity-plus-price initial agreement and a schedule of option contracts that yield the first-best decisions. The price/quantities do not change whether ex post renegotiation is permissible. However, channel efficiency and the firms’ profits improve when ex post renegotiation is permissible. Because of the flexibility of option contracts, the firms renegotiate only if the buyer exercises up options and wants to buy more ex post, while they renegotiate with certainty under the optimal quantity-plus-price initial contract.

Engaging suppliers for reliability improvement under outcome-based compensations

Many durable products are now servicized with outcome-based contracts under which customers pay for uptime. Outcome-based contracting poses challenges to product support management, because the customers’ losses due to system outages result in penalties for the OEM. Moreover, in many cases product failures are caused by defective subsystems or components that are manufactured by the OEM’s suppliers. Not involving suppliers in product support leads to a lack of incentives for product reliability improvement and thus higher failure rates, which increases product downtime risk. In this paper, we study how the OEM should incentivize its suppliers to improve product reliability under outcome-based contracts. We find that the more recent repair cost sharing contracts perform better than the traditional price-only contracts. However, in the presence of outcome-based contracting, sharing repair cost results in underinvestment in product reliability and overinvestment in repair capacity, which leads to lower system uptime. We then propose a downtime penalty sharing contract which can optimally incentivize the upstream suppliers to improve product reliability, regardless of the repair capacity structure or product separability into constituent parts.

Better to Bend than to Break: Sharing Supply Risk Using the Supply-Flexibility Contract

Problem definition : We analyze a contract in which a supplier who is exposed to disruption risk offers a supply-flexibility contract comprising of a wholesale price and a minimum-delivery fraction (“flexibility” fraction) to a buyer facing random demand. The supplier is allowed to deviate below the order quantity by at most the flexibility fraction. The supplier’s regular production is subject to random disruption, but she has access to a reliable expedited supply source at a higher marginal cost. Academic/practical relevance : Despite the prevalence of supply-flexibility contracts in practice, to the best of our knowledge, there is no previous academic literature examining the optimal design of supply-flexibility contracts. As such, the level of flexibility in practice is usually set on an ad-hoc basis, with buyers typically reluctant to share risk with suppliers. Our analysis of supply-flexibility contracts informs practice in two ways: First, using analytically supported arguments, it educates managers on the effects of their decisions on the economic outcomes. Second, it shows that the supply-flexibility contract benefits both the supplier and the buyer, regardless of which player chooses how supply risk is allocated in the supply chain. Methodology : Non-cooperative game theory, non-convex optimization. Results : We derive the supplier-led optimal contract and show that supply chain efficiency improves relative to the price-only contract. More interestingly, even though the buyer lets the supplier decide how the two share supply risk, profits of both the players increase by the introduction of flexibility into the contract. Further, supply flexibility may be even more valuable for the buyer compared with the supplier. Interestingly, the flexibility fraction is not monotone in supplier reliability and a more reliable supplier may even prefer to transfer more risk to the buyer. The robustness of these findings is established on two extensions: one where we study a buyer-led contract (i.e., the buyer chooses the flexibility fraction) and the other where the expedited supply option is available to both the supplier and the buyer. Managerial implications : The supply-flexibility contract is mutually beneficial for both players and yet retains all the advantages of the price-only contract—it is easy to implement, it requires minimal operational and administrative burden, and there is evidence of the use of such contracts in practice. While our focus is not on supply chain coordination, we note that the combination of two mechanisms—the supply-flexibility contract derived in this paper to share supply risk and a buyback contract to share demand risk—yields a coordinating contract.

Multi-resource emergency supply contracts with asymmetric information in the after-sales services

In this paper, we investigate the contract design in a multi-resource service supply chain between a first line service provider and an emergency supplier under information asymmetry. The service provider is contractually responsible for the timely repair of the assets that fail, under a given service level agreement with the asset owner. To execute a repair, the service provider needs both engineers and spare parts to replace malfunctioning parts. In case of a spare parts stock out, the service provider can either wait for the regular replenishment of parts from the central depot or decide to hand over the entire call to an emergency supplier. For the latter case, a contract between the service provider and the supplier is necessary that specifies how the emergency supplier is compensated by the service provider. Particularly, we investigate what is the best contract the supplier can offer when information on asset reliability only resides with the service provider but remains hidden for the emergency supplier (information asymmetry). In the first type of contracts, the supplier charges the service provider a price, specified in a so-called price-only contract, for each time he takes over a call. As an alternative, we study the so-called revenue-sharing contracts in which the supplier receives a fraction of the service provider’s annual revenue and in return agrees to charge a lower price per call. In addition to the standard (single) revenue-sharing contract, we study the implementation of a menu of revenue-sharing contracts. We show that finding a menu of revenue-sharing contracts is not always possible and, if possible, does not necessarily give a higher profit to the supplier than a single revenue-sharing contract. In an extensive numerical experiment, we show that the combination of the single and the menu of revenue-sharing contracts results in, on average, less than 5% loss of the supplier profit under perfect (symmetric) information. Additionally, we find that, while having private information on the assets’ failure rates increases the service provider profit, the increase is insignificant, resulting in an additional profit of only 0.06% on average. Finally, we observe that the supplier can increase his profit, on average, up to 14% if he incites the LSP by means of a side-payment mechanism to share his private information.

Achieving Economic and Environmental Sustainability: Minimum Transport Quantity, Contracts, and Emissions Regulation

Problem Definition: We study the strategic interactions between a supplier and a retailer under demand uncertainty when the supplier has two options for how to ship a product: (i) road transport, which is expensive, high-emission and flexible, and (ii) rail transport, which is cheap, green, and is constrained by a minimum transport quantity (MTQ). Academic / Practical Relevance: Rail transport has been regarded as one of the most practical ways to increase supply chain sustainability. However, the volume shifted from road to rail has remained modest during the last decades. One of the reasons is that rail transport lacks flexibility in its delivery quantity and often requires an MTQ. Methodology: The supplier and the policymaker prefer rail transport because of the advantages of low cost and low emission. However, the shipment quantity, which is determined by the retailer, may not reach the MTQ. The supplier and the policymaker can design incentives (contracts and emission tax) to encourage the use of rail transport. In this work, we build a game-theoretic model for this setting and investigate the impact of the MTQ on the economic and environmental performance of the supply chain and the effect of a tax on emissions. Results: We find that, although MTQ is operationally constraining and can lead to overproduction, it can be turned into a beneficial factor through proper decisions, which would lead to several merits as follows. (1) The MTQ can significantly improve the efficiency of simple supply chain contracts (e.g., price-only contracts). (2) The MTQ does not hurt the efficiency of coordinating contracts (e.g., buy-back contracts) and can increase the supplier’s Pareto-optimal profit. (3) The MTQ can enable coordinating contracts to achieve a higher supply chain profit and fewer total emissions simultaneously, which is not possible without the MTQ. Moreover, we show that, although it can lead to fewer total emissions, an emission tax is more likely to be ineffective in encouraging the use of the green transport mode when firms use coordinating contracts compared to price-only contracts. Managerial Implications: We provide suggestions to firms on how to make optimal decisions and make the best use of different transport modes when dealing with demand risk. Also, we provide suggestions to policymakers on how to design the proper emission tax to promote green logistics.

Green product supply chain contracts considering environmental responsibilities

Environmental sustainability has become an important metric for assessing the success of supply chain management. We study several cooperation contracts within a green product supply chain and investigate their environmental performance. Stakeholders’ environmental responsibilities are considered in a two-echelon supply chain in which consumers are environmentally conscious, a manufacturer designs and produces a green product, and a retailer promotes the green product in its marketplace through green marketing. This problem is analyzed and modeled under three contracts in order of increasing cooperation level: price-only, green-marketing cost-sharing, and two-part tariff contracts. The analytical results show that cooperation among partners can help the supply chain achieve environmental improvements. Cooperating contracts are valuable in practice because consumers are now paying more attention to sustainability and have become more environmentally conscious. A counterintuitive but interesting result is that cooperation may not always profitably benefit all partners; manufacturing becomes more profitable when the manufacturer shares the green-marketing cost with the retailer, whereas the retailer is worse off under the cost-sharing contract than under the price-only contract. This result is more significant when consumers’ green awareness increases. The results on social-welfare performance show that the supply chain’s social welfare increases with the increase of the supply chain’s cooperation level.

A composite contract for coordinating a supply chain with sales effort-dependent fuzzy demand

In this paper, we study the coordination problem for a supply chain composed of one supplier and one retailer when the demand is a fuzzy variable that is dependent on sales effort. We find that neither a buyback contract nor a promotion cost-sharing contract can coordinate the supply chain in this setting. Furthermore, we design a composite contract by combining a buyback contract with a promotion cost-sharing contract to coordinate the supply chain and analyze the coordination conditions. We also draw a performance comparison of the designed composite contract and the price-only contract for the profit maximization of the supply chain and present some extensions. Finally, the main theoretical results and the effectiveness of the designed composite contract are illustrated with numerical examples. We show that the production cost and sensitivity parameter of effort cost have negative impacts on the expected profits of the supplier, the retailer and the entire supply chain, whereas basic demand and the sensitivity parameter of demand stimulation have positive impacts on their profits.

Better to Bend than to Break: Sharing Supply Risk Using the Supply-Flexibility Contract

Problem Definition: We analyze a contract in which a supplier, who is exposed to disruption risk, offers a supply-flexibility contract comprising of a wholesale price and a minimum-delivery fraction (flexibility'' fraction) to a buyer facing random demand. The supplier is allowed to deviate below the order quantity by at most the flexibility fraction. The supplier's regular production is subject to random disruption but she has access to a reliable expedited supply source at a higher marginal cost. Academic/Practical Relevance: Despite the prevalence of supply-flexibility contracts in practice, to the best of our knowledge, there is no previous academic literature examining the optimal design of supply-flexibility contracts. As such, the level of flexibility in practice is usually set on an ad-hoc basis, with buyers typically reluctant to share risk with suppliers. Our analysis of supply-flexibility contracts informs practice in two ways: First, using analytically-supported arguments, it educates managers on the effects of their decisions on the economic outcomes. Second, it shows that the supply-flexibility contract benefits both the supplier and the buyer, regardless of which player chooses how supply risk is allocated in the supply chain. Methodology: Non-Cooperative Game Theory, Non-Convex Optimization. Results: We derive the supplier-led optimal contract and show that supply-chain efficiency improves relative to the price-only contract. More interestingly, even though the buyer lets the supplier decide how the two share supply risk, profits of both the players increase by the introduction of flexibility into the contract. Further, supply-flexibility may be even more valuable for the buyer compared to the supplier. Interestingly, the flexibility fraction is not monotone in supplier reliability and a more reliable supplier may even prefer to transfer more risk to the buyer. The robustness of these findings is established on two extensions: one where we study a buyer-led contract (i.e., the buyer chooses the flexibility fraction) and the other where the expedited supply option is available to both the supplier and the buyer. Managerial Implications: The supply-flexibility contract is mutually beneficial for both players and yet retains all the advantages of the price-only contract -- it is easy to implement, requires minimal operational and administrative burden, and there is evidence of the use of such contracts in practice. While our focus is not on supply-chain coordination, we note that the combination of two mechanisms -- the supply-flexibility contract derived in this paper to share supply risk and a buyback contract to share demand risk -- yields a coordinating contract.

A dynamic price-only contract: Exact and asymptotic results

We consider a two echelon supply chain with a single seller and a single buyer. We propose what we call a generalized price-only contract, which is a dynamic generalization of the simple wholesale price-only contract. We derive some interesting properties of this contract and relate them to well known issues such as double marginalization, relative power in a supply chain due to Stackelberg leadership, contract structure and commitment.

Sub-supply chain coordination in a three-layer chain under demand uncertainty and random yield in production

One of the major objectives of modern supply chain management is to deal with the growing decentralization among the involved entities and hence minimizing the double marginalization effect inside the chain, especially when the end-customers' demand is not deterministic. To address this, a three-layer supply chain with one raw-material supplier, one manufacturer and one retailer is developed and studied in this paper. Effects of both supply chain coordination as well as sub-supply chain coordination are examined. Optimal order and production quantities are obtained for the centralized system which depicts the scenario under coordination. Optimal order quantities and expected profits of the individual channel actors are maximized locally in the decentralized system under commonly used price-only contract. Semi-integrated models are also studied under price only contract. The optimal strategies under different power structures are compared, and the effects of the channel parameters on the optimal strategies are also examined. Numerical example is given to illustrate the developed model.

Service quality coordination contracts for online shopping service supply chain with competing service providers: integrating fairness and individual rationality

Service quality coordination is a critical issue of online shopping service supply chain (OSSSC) management. However, such decision-making is problematic due to the behavior of channel members with characteristics of individual rationality and concerns of fairness. The two characteristics matter much to the performance and service quality of the supply chain. Therefore, a service quality coordination contract for the OSSSC should be designed based on these two behavioral elements. This paper proposes two novel models, which take into account the two important elements mentioned above and designs coordination contracts for the OSSSC with two competing third party logistics (TPL) companies and a single online store. Equilibrium decisions in two benchmark scenarios (decentralized and centralized control) were analyzed, revealing that the use of a traditional price-only contract cannot appropriately coordinate the supply chain. Both proposed contracts can be used to realize global and partial coordination of the OSSSC, respectively. This is caused since both models utilize the game theory to achieve unification of individual and collective rationality, and fair allocation of the system surplus profits based on individual decisions. Numerical experiments were conducted to examine the impact of the intensity of the competition between both TPL companies on their decisions and the attention of the online store to the ratio of service level to the service price on the coordination effect.

Research on Decentralized Supply Chain with Channel-Wide Profit Maximization

This study explores the problem of optimally dynamic joint decisions: replenishment quantity, retail price and depletion time, in a vertically decentralized single-retailer and single-supplier supply chain over a dynamic multi-period planning horizon, subject to multivariate demand function and deteriorating goods with shortages allowed and with no consideration of fixed costs. This research uses a calculus-based formulation coupled with dynamic programming techniques to solve the channel-wide profit maximization under price-only contract and consignment contract respectively. The analysis reveals that the consignment contract can significantly achieve higher channel-wide profit than the price-only contract for the dynamic decentralized channel.

Supply Chain Management: Horizontal carrier coordination through cooperative governance structures

This paper examines how governance structures found in the trucking industry impact the coordination between a forwarder and its carriers, including three cases: no forwarder coordination (direct contracting with shippers), investor-owned coordination (price-only contract), and carrier-cooperative coordination (revenue-sharing contract). The carriers are engaged in a Cournot competition, where they decide upon service provision and truck investment. Economic theory predicts that integration of firms under oligopolistic competition always leads to a more efficient supply chain in the sense that prices decrease and quantities increase, which reduces total profits. This suggests that the benefit of avoiding double marginalization does not outweigh the benefit of upstream competition in the successive oligopoly case, whereas both integrated and independent firms coexist, the integrated chains do perform better. In this paper we examine the interaction between governance structures, a key decision when managing supply chains, including that found in the trucking industry, and shippers willingness to procure trucking services instead of producing them using a private fleet. We find that cooperative governance can contribute to improved service provision, reduced service price, improved consumer surplus, and improved profit for the carriers in equilibrium. We use parameter values based on the Swedish trucking industry and a larger grocery retailer acting as shipper to numerically illustrate the impact of different governance structures.

New structural properties of supply chains with price-only contracts

We show that the manufacturer’s problem in two-stage push supply chains with price-only contracts can be reformulated as a newsvendor problem with a modified demand distribution. This reformulation provides additional managerial insights, facilitates the solution of a problem with competing retailers under more general assumptions and reduces a number of three-stage problems to equivalent two-stage problems.

Impact of the downside risk of retailer on the supply chain coordination

This paper analyzes the coordinating mechanisms for a single-period supply chain comprising of one supplier and one retailer. The later is constrained by downside risk. We model the decision problems with the newsvendor model, and then analytically derive the optimal order policies of the retailer. We have analyzed several often used coordinating mechanisms under retailer downside risk constraint. We find that none of the price-only contract, returns policies contract and revenue sharing contract can coordinate a supply chain with retailer’s downside risk constraint. However, by integrating the transfer payment contract with returns policy contract and the revenue sharing contract, perfect coordination is possible. For optimal decisions of the supplier, we use the numerical method to analyze the effect of the retailer downside risk on decision variables, and profits of the supplier and the retailer. Compared with the case of no risk constraints, the study has shown that the splitting of the expected channel profits between the supplier and the retailer is dependent on the retailer’s risk attitude. The more risk-reverse the retailer is, the lower are the profits earned by the retailer and, of course, the more are the profits of the supplier. We close with a discussion of contract implementation issues and future research.

Selling a Product Line Through a Retailer When Demand Is Stochastic: Analysis of Price-Only Contracts

Problem description: In practice, many consumer products are produced and stocked in product lines rather than in single product variants. The issue is that manufacturers and retailers often do not agree on the product line length (i.e., the number of variants included in the product line). The focus of this study is to understand how product line length and stocking quantities depend on how demand risk is contractually allocated. Academic/practical relevance: Our model combines assortment and stocking decisions in the presence of stochastic demand; previous models could address either assortment or stocking issues, but not necessarily both. Methodology: We present a game-theoretic model of a bilateral supply chain in which a manufacturer (he) sells up to two differentiated products through a retailer (she). He decides which products to produce, their wholesale prices, and how to allocate demand risk. We theorize that he can either retain the risk (by adopting a pull contract) or that he can pass it onto the retailer (by adopting a push contract). She responds by choosing assortment, quantities, and retail prices. By solving the model, we develop a descriptive theory that clarifies his incentive to expand his product offering and to reallocate demand risk within the supply chain. Results: Depending on the level of product differentiation, we identify three regions. When product differentiation is either low (commodities) or high (specialized products), the contract choice affects order quantities but not assortment. In these regions, the manufacturer’s contract choice can be explained by looking at elasticity of wholesale demand. For products with some differentiation, the manufacturer’s contract choice affects both order quantities and assortment. In this region, the manufacturer’s contract choice can be explained by looking at the additive effect of demand elasticity and sales expansion from the extended product line net of cannibalization. Managerial implications: Our paper can be seen as a first step toward developing a link between optimal product line design and optimal risk allocation in a bilateral supply chain.

Selling a Product Line Through a Retailer When Demand Is Stochastic: Analysis of Price-Only Contracts

To expand sales, many manufacturers try to develop and sell product lines. Frequently, however, the operations of distributing a product line creates tension between manufacturers and retailers as they do not necessarily agree on which product versions included in the product line should be sold to consumers. To mitigate this tension, previous literature has shown that if a manufacturer (he) wants to sell his product line through a retailer (she) who faces deterministic demand, then he needs to adjust his product qualities according to her requirements; otherwise she will not carry the entire line. In contrast, this paper shows that if demand is stochastic, then a manufacturer can mitigate the same tension merely by re-allocating inventory risk in the supply chain. This strategy can be so effective that it is possible to find cases where the equilibrium product line is actually longer in a decentralized supply chain than in the direct-selling case. To understand the tradeoff, we consider a supply chain with a manufacturer capable of producing multiple product designs and a retailer who faces stochastic consumer demand. The manufacturer sells his output through the retailer using one of the following variations on the classical wholesale contract: push (PH), pull (PL), or instantaneous fulfillment (IF). With PH and PL (IF), wholesale prices and quantities are decided before (after) demand is revealed. Retail prices are always set after demand is revealed. With PH (PL) the retailer (manufacturer) carries retail inventory. Taking the manufacturer's point of view, we characterize the equilibrium product line length and equilibrium contracting strategy. Our answers are determined by three important drivers: demand variability, product substitutability, and the retailer's outside option. Low outside option and low (high) substitutability imply that the manufacturer maximizes his expected profit offering the retailer longer (shorter) product line using the IF contract. As outside option increases, the equilibrium contract will be either PH or PL. High demand variability and low substitutability imply that the manufacturer should be expected to sell a longer product line with a PH contract. Low demand variability and high substitutability imply that the manufacturer should be expected to sell a shorter product line with a PL contract.