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Component Procurement Strategies in Decentralized Assemble-to-Order Systems with Time-Dependent Pricing

Sheldon B. Lubar School of Business, University of Wisconsin–Milwaukee, Milwaukee, Wisconsin 53211
The Paul Merage School of Business, University of California, Irvine, Irvine, California 92697
A. Gary Anderson Graduate School of Management, University of California, Riverside, Riverside, California 92521
fangx{at}uwm.edu
rso{at}uci.edu
yunzeng.wang{at}ucr.edu

We consider a contract manufacturer who procures multiple components from independent suppliers to produce an assemble-to-order customized product for a client. The unit price of the product depends on the manufacturer's delivery lead time. We explore how the manufacturer can use a vendor-managed consignment inventory (VMCI) scheme to manage the underlying risk and coordinate independent suppliers' decisions on the production quantities of their components under demand uncertainty. We formulate the problem as a Stackelberg game played by the manufacturer against her component suppliers to determine her pricing policy for suppliers' consignment inventories. We further develop an efficient algorithm for finding the manufacturer's optimal pricing scheme. Our results provide useful insights for managing components in these types of assemble-to-order environments and for understanding how component production cost and procurement lead times affect individual firms' performance in decentralized assembly channels.

Key Words: assemble-to-order manufacturing; lead time management; vendor-managed inventory; consignment inventory; pricing strategies
History: Received: July 31, 2006;