Coordination in the decentralized assembly system with dual supply modes

Abstract

This paper investigates a decentralized assembly system that consists of one assembler and two independent suppliers; wherein one supplier is perfectly reliable for the production, while the other generates yield uncertainty. Facing the random market demand, the assembler has to order the components from one supplier in advance and meanwhile requires the other supplier to deliver the components under VMI mode. We construct a Nash game between the supplier and the assembler so as to derive their equilibrium procurement/production strategies. The results show that the channel's performance is highly undermined by the decentralization between players and also the combination of two supply modes. Compared to the centralized system, we propose an advance payment contract to perfectly coordinate the supply chain performance. The numerical examples indicate some management implications on the supply mode comparison and sensitivity analysis. © 2013 Xu Guan and Mengqi Liu.