Dynamic Cost Reduction Through Process Improvement in Assembly Networks

Abstract

We consider a decentralized assembly system in which a buyer purchases components from several first-tier suppliers. We examine the dynamics of suppliers' investments in cost-reduction initiatives over the life cycle of a product under different procurement approaches. We model the suppliers' investment decisions under cost-contingent contracts, with wholesale prices determined on the basis of the prevailing component costs, as a dynamic game in closed-loop strategies. We show that there always exists an equilibrium in which the suppliers' investments are synchronized, that is, in each period either all suppliers invest in process improvement or no supplier does. We also consider target-price contracts, under which the assembler announces the rate of component cost reduction to be achieved over the product's life cycle at the beginning of the contractual relationship. We show that target-price contracts lead to higher investment levels and profits if the rates are properly specified. In general, the equilibrium investments of the suppliers are lower than those under centralized control. The buyer can eliminate this inefficiency by subsidizing a certain fraction of the costs of investments. We extend the model to a setting with two competing assemblers and knowledge spillover at the suppliers. We find that the level of inefficiency under decentralized control decreases with increased competition and spillover rate.assembly systems, process improvement, dynamic games, procurement, supplier management

Towards dynamic contract extension in supplier development

“…Here, u(t) describes the number of supplier development projects at time t; with capacity bound x [ 0 to reflect limited availability of resources in terms of time, manpower, or budget. Similar models of cost reduction through learning have been proposed by [4,11,20,27,56]. The costs of supplier development are integrated into the proposed model by a penalization term c SD uðtÞ, c SD !…”

“…This market condition is comparable with an oligopolistic or monopolistic market structure, in which a firm can increase market demand by lowering the sale price. Similar approaches to specify the price distribution curve have been proposed by [4,20,27].…”

“…This assumption is not completely new: Honda Motor Company, e.g., first learns extensively about a suppliers cost structure and then specifies a target price that combines both the suppliers unit production cost and a percent margin [29]. Similar approaches to specify the supply costs have been proposed by [4,21,27]. Summing up, the supply chain profit is given by…”

Impact of Supplier's RaD Investment on Supply Chain Operations under Stochastic Isoelastic Demand and Consignment Contract

“…Lin (2001, 2003) study R&D investment in a one-to-many supply chain. Bernstein and Kök (2009) and Bernstein et al (2015) explore R&D investment in a many-to-one supply chain. Ishii (2004) and Gupta (2008) consider R&D investment in a many-to-many supply chain.…”

Supplier's RaD Investment in Manufacturer in A Decentralized Supply Chain with Quality and Price Sensitive Demand

“…[1,2] consider R&D investment in a one-to-many supply chain. [3,4] investigate R&D investment in a many-to-one supply chain. [7,9] explore R&D investment in a many-to-many supply chain.…”