{"title":"Applying fixed order commitment contracts in a capacitated supply chain","authors":"Christina Imdahl , Kai Hoberg , William Schmidt","doi":"10.1016/j.ejor.2024.08.018","DOIUrl":null,"url":null,"abstract":"<div><p>Demand uncertainty can lead to excess inventory holdings, capacity creation, emergency deliveries, and stock-outs. The costs of demand uncertainty may be directly borne by upstream suppliers, but can propagate downstream in the form of higher prices. To address these problems, we investigate a practical application of a fixed order commitment contract (FOCC) in which a manufacturer commits to a minimum fixed order quantity each period and receives a per unit price discount from the supplier for the commitment. We model a FOCC as a Stackelberg game in which the supplier offers a price discount anticipating the manufacturer’s response, and the manufacturer subsequently decides on the optimal commitment quantity. We show that a FOCC can smooth the orders received by the supplier, mitigating the negative consequences of demand uncertainty for the supplier, the manufacturer, and the supply chain. We extend the current literature by solving for an endogenous price discount instead of treating it as an exogenous value, and validate our model insights with our research partner, a large international materials handling equipment manufacturer. Using data on 863 parts, we evaluate the relationships between the model parameters, contract parameters, and the contract effectiveness, and show the conditions under which the FOCC generates greater cost savings for both the manufacturer and supplier. Our results help operations managers better understand how to obtain the optimal contract parameters for a FOCC and the circumstances under which such a contract is most beneficial for the company and its supply chain.</p></div>","PeriodicalId":55161,"journal":{"name":"European Journal of Operational Research","volume":"320 2","pages":"Pages 358-374"},"PeriodicalIF":6.0000,"publicationDate":"2024-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0377221724006416/pdfft?md5=e0219f39b5dbac37253f69b7c4413732&pid=1-s2.0-S0377221724006416-main.pdf","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"European Journal of Operational Research","FirstCategoryId":"91","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0377221724006416","RegionNum":2,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"OPERATIONS RESEARCH & MANAGEMENT SCIENCE","Score":null,"Total":0}
引用次数: 0
Abstract
Demand uncertainty can lead to excess inventory holdings, capacity creation, emergency deliveries, and stock-outs. The costs of demand uncertainty may be directly borne by upstream suppliers, but can propagate downstream in the form of higher prices. To address these problems, we investigate a practical application of a fixed order commitment contract (FOCC) in which a manufacturer commits to a minimum fixed order quantity each period and receives a per unit price discount from the supplier for the commitment. We model a FOCC as a Stackelberg game in which the supplier offers a price discount anticipating the manufacturer’s response, and the manufacturer subsequently decides on the optimal commitment quantity. We show that a FOCC can smooth the orders received by the supplier, mitigating the negative consequences of demand uncertainty for the supplier, the manufacturer, and the supply chain. We extend the current literature by solving for an endogenous price discount instead of treating it as an exogenous value, and validate our model insights with our research partner, a large international materials handling equipment manufacturer. Using data on 863 parts, we evaluate the relationships between the model parameters, contract parameters, and the contract effectiveness, and show the conditions under which the FOCC generates greater cost savings for both the manufacturer and supplier. Our results help operations managers better understand how to obtain the optimal contract parameters for a FOCC and the circumstances under which such a contract is most beneficial for the company and its supply chain.
期刊介绍:
The European Journal of Operational Research (EJOR) publishes high quality, original papers that contribute to the methodology of operational research (OR) and to the practice of decision making.