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Research of Supplier’s Capacity Investment Based on Long-term and Compensation Contracts

Author: XuXiaoDong
Tutor: ZhongLeiGang
School: Northeastern University
Course: Management Science and Engineering
Keywords: long-term contract compensation contract supply chain coordination production capacity compensation coefficient
CLC: F224
Type: Master's thesis
Year: 2009
Downloads: 31
Quote: 0
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For all enterprises, production capacity is a very important issue, which plays a vital role in the development of the business. In this increasingly competitive market, the life cycle of new products is being shorter and shorter, which would make the enterprises produce several generations of products with different quantities and technology. In that case, the production capacity design is very important in the enterprise management. Generally, the supplier has to invest in capacity before seeing the demand, and the manufacturer makes his final order after seeing the demand. If demand for the final product is stochastic then the supplier has an incentive to keep its capacity relatively low to avoid creating unneeded capacity. The manufacturer, on the other hand, prefers the suppplier’s capacity to be high to ensure that the final demand is satisfied.This paper summed up the research results of supply chain contract and production capacity, analyses the supply chain consisting of one suplier and one manufacturer. The manufacturer purchases a kind of key component from the supplier and manufactures the final product. Demand is stochastic, the manufacturer can purchase the key component from other sources with a higher price if the supplier’s capacity is constrained. The wholesale price and capacity are respectively determined by the manufacturer and the supplier. In this paper, long-term and compensation contracts are put forward, the former can induce the supplier to invest in more capacity than under the wholesale price contract, the latter effectively coordinates the decision behaviors of the manufacturer and the supplier. The contents of this paper are as below.(1) In long-term contract, this paper establish the supplier’s capacity model respectively under conditions of centralized and decentralized supply chains. We analyze and compare the optimal capacity for the supply chain of different contract period under centralized decision-making, the supplier’s capacity and wholesale price of different contract period under decentralized decision-making. By the model and numerical analysis, results indicate long-term contracts increase the supplier’s capacity and the profit potential of the supply chain, but cannot realize the supply chain coordination.(2) Combination of compensation and long-term contracts, we consider the decision-making behavior of supply chain system and the members under supplie’s short capacity and overcapacity both cases respectively. Meanwhile we analyze the supply chain system and its numbers’decision-making behavior and design the appropriate contract parameters to encourage the numbers taking a part in the supply chain collaboration. The numerical analysis shows that, with both cases of supplie’s short capacity and overcapacity, we can achieve the coordination of the supply chain and reach Pareto optimization by setting a reasonable contract parameter.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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