Equipment leasing supply chain with demand uncertainty

Equipment leasing in many industries is a big business and growing fast. Motivated by our interactions with industry, we consider an equipment leasing supply chain where a manufacturer rents a piece of equipment to an operator who uses the equipment to serve its customers with a stochastic demand rate. The manufacturer and the operator sign a usage-based lease contract under which the operator pays a fixed rental plus a variable rental per unit of equipment usage to the manufacturer, while the manufacturer provides maintenance services during the lease period. There are two decisions to be made in this supply chain: the manufacturer’s periodic preventive maintenance policy, and the operator’s production rate (or equipment usage) decision. We first propose a Stackelberg game model, where the manufacturer acts as the leader and determines the maintenance policy first before the actual demand is known to maximize its own expected profit, followed by the operator who acts as the follower and decides the optimal production rate after the actual demand becomes known to maximizes its own profit, given the manufacturer’s maintenance policy. We also propose a centralized model, where the two parties jointly make the maintenance and production rate decisions after the actual demand is known, to maximize the total profit of the supply chain. We analyze and solve these models analytically and obtain various insights into the interplay between the manufacturer’s maintenance policy and the operator’s production rate in the presence of demand uncertainty. Our computational results show that the total expected profit of the supply chain at the Stackelberg equilibrium is consistently lower than that at the optimal centralized solution. To improve the expected profit for both parties in the supply chain under the Stackelberg game, we propose two coordination mechanisms: a cost-sharing incentive mechanism without information sharing, and a joint cost and information sharing mechanism. We find that when designed properly, the cost sharing mechanism can improve the expected profit for both the manufacturer and the operator. However, it cannot eliminate the negative effect brought by the asymmetric demand information, thus failing to achieve the optimal centralized solution. On the other hand, the joint cost and information sharing mechanism yields a solution that improves the expected profit for the both parties, and is also optimal for the centralized system.