Quantitative analysis in supply chain outsourcing

Abstract

In the manufacturing industry, the production output is constrained due to the limited capital flow. It is a fatal weakness to the manufacturer as well as to component suppliers. When component suppliers incur budget constraints, the manufacturer can share a proportion of each supplier's production cost to relieve her from such restraint. We intend to study the manufacturer's optimal solution of the cost share amounts and analyze how such sharing will affect the suppliers' performances. Since it involves multiple suppliers, we will further explore how different decision sequences will affect the equilibrium. On the other hand, when two competing manufacturers (or firms) incur capacity constraints in the demand market, they have to make the decisions on the capacity investment. Therefore, we propose two types of model in this thesis to study the above problems. In the first model, we consider one manufacturer who sources multiple complementary components, each from one independent supplier who has the budget constraint. Facing with the uncertain demand, the manufacturer decides on the cost share amounts given to his suppliers. We analyze three different decision sequences in this model: a) simple sequential decisions in wholesale prices, b) simultaneous decisions in wholesale prices and c) hybrid sequential decision in alternating cost share amounts and wholesale prices.Compare first two sequences, we find that the manufacturer strictly prefers the simultaneous setting. On the contrary, the supplier who makes the decision first in the simple sequential setting gets worse in the simultaneous decision sequence. We then study the manufacturer's optimal solutions in the hybrid sequential decision setting. Different from the simple sequential setting, the equilibrium is asymmetric in hybrid setting. Furthermore, the supplier who decides first also charges a higher wholesale price than other suppliers which underlines our exploration that early action boosts the supplier's bargaining power no matter whether the manufacturer shares the cost or not. In the second model, we consider a setting of two firms serving one market whose demand is price sensitive and uncertain. We characterize the equilibrium capacity and production decisions by the two firms. The result shows that the firm whose process efficiency is more prone to improving as capacity expands will invest in more capacity and achieve a more efficient process given that production is not overly labor and material intensive. To the best of our knowledge, this is the initial research to study cost sharing in a multiple-suppliers model with three decision sequences, especially with the new hybrid decision setting. While the cost sharing is always beneficial to the manufacturer, we surprisingly find that the supplier who charges the highest wholesale price is averse it even if her cost burden is loosed after cost sharing. We also show the conditions under which cost sharing benefits the suppliers. Furthermore, the result also illustrates that different decision sequences have different impacts on the equilibrium and the resulting channel performance. In the second model, we find out the optimal solution under the circumstance where two firms make the competing decisions on the capacity investment.