A negotiation-based algorithm to coordinate supplier development in decentralized supply chains

M. Proch, K. Worthmann and J. Schlüchtermann

European Journal of Operational Research, 2017, vol. 256, issue 2, 412-429

Abstract: In this paper, we study supplier development in a decentralized supply chain with a single manufacturer and a single supplier. Because supplier development usually requires relationship-specific investments, the allocation of investment costs is a critical issue faced by participating firms. Referencing the relational view, we first investigate the effects of relationship-specific investments on the efficiency and effectiveness of supplier development. Next, we formulate and solve a continuous time optimal control model characterizing the decision to invest in supplier development and show that the supplier’s incentive to participate in supplier development critically depends on the manufacturer’s share of investment costs. The findings of our numerical analysis indicate that although the subsidy can lead to significant improvement in supply chain performance, subsidizing a constant share of investment costs is not always economically reasonable from the manufacturer’s point of view. Thus, we provide a negotiation-based algorithm that assists the manufacturing firm in gradually increasing the share of investment costs to ensure an efficient level of subsidy, resulting in both perfect supply chain coordination and a win–win situation.

Keywords: Supply chain management; Supply chain coordination; Supplier development; Optimal control; Relational view (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:256:y:2017:i:2:p:412-429

DOI: 10.1016/j.ejor.2016.06.029

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