Improving reliability of a shared supplier with competition and spillovers

Yimin Wang, Yixuan Xiao, Nan Yang

Research output: Contribution to journalArticle

38 Scopus citations

Abstract

Supplier reliability is a key determinant of a manufacturer's competitiveness. It reflects a supplier's capability of order fulfillment, which can be measured by the percentage of order quantity delivered in a given time window. A perfectly reliable supplier delivers an amount equal to the order placed by its customer, while an unreliable supplier may deliver an amount less than the amount ordered. Therefore, when suppliers are unreliable, manufacturers often have incentives to help suppliers improve delivery reliability. Suppliers, however, often work with multiple manufacturers and the benefit of enhanced reliability may spill over to competing manufacturers. In this study, we explore how potential spillover influences manufacturers' incentives to improve supplier's reliability. We consider two manufacturers that compete with imperfectly substitutable products on Type I service level (i.e.; in-stock probability). The manufacturers share a common supplier who, due to variations in production quality or yield, is unreliable. Manufacturers may exert efforts to improve the supplier's reliability in the sense that the delivered quantity is stochastically larger after improvement. We develop a two-stage model that encompasses supplier improvement, uncertain supply and random demand in a competitive setting. In this complex model, we characterize the manufacturers' equilibrium in-stock probability. Moreover, we characterize sufficient conditions for the existence of the equilibrium of the manufacturers' improvement efforts. Finally, we numerically test the impact of market characteristics on the manufacturers' equilibrium improvement efforts. We find that a manufacturer's equilibrium improvement effort usually declines in market competition, market uncertainty or spillover effect, although its expected equilibrium profit typically increases in spillover effect.

Original languageEnglish (US)
Pages (from-to)499-510
Number of pages12
JournalEuropean Journal of Operational Research
Volume236
Issue number2
DOIs
StatePublished - Jul 16 2014
Externally publishedYes

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Keywords

  • Game theory
  • Reliability
  • Spillover
  • Supplier improvement
  • Supply chain management

ASJC Scopus subject areas

  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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