Order quantity flexibility as a form of customer service in a supply chain contract model

Abstract

This paper analyzes the Quantity-Flexibility (QF) contract, under which the buyer provides to the supplier information about expected future orders for the predetermined horizon and the supplier, in return, provides the buyer with the flexibility to adjust future orders later. Under this scheme, the flexibility profile of the contract can be perceived by the buyer as a form of customer service, by which the supplier commits to fulfil the buyer's maximum likely order at the cost of the supplier's inventory risk. The simulation results show that the benefit of the contract to either party clearly depends on the flexibility profile of the contract. For the supplier, there exists a trade-off between customer service level and inventory risk associated with the flexibility profile. However, for the buyer, the flexibility demonstrates a principle of diminishing returns, which is contrary to the general notion that buyers always prefer more order quantity flexibility. In fact, greater flexibility does not always translate into better customer service to buyers.

Dynamic transfer pricing under conditions of uncertainty – the use of real options

“…Managerial flexibility allows managers to respond appropriately to new information, which increases the value of the option to wait and the likelihood of reducing or postponing current decisions (Xie, 2009), thus potentially increasing firm value. Kim (2011) also supports the argument that flexibility is beneficial in ambiguous and uncertain business environments. Finally, using a real options approach, firms can downplay product customization, uniqueness and complexity as this can be handled by the cafeteria approach, which provides multiple transfer prices.…”

A contract portfolio perspective on the role of customer order lead times in demand fulfilment processes with supply shortage

“…Contracts setting minimum order lead times for customers determine the minimum horizon with which a customer has to communicate a final order quantity to its supplier. The literature in these fields investigates the necessary conditions for supply chain partners to conclude such contracts and determines the optimal behaviour of supply chain partners for a given contractual relationship in order to study its effects on the overall supply chain performance and the distribution of risks within the supply chain (Iyer and Bergen 1997;Tsay 1999;Tsay and Lovejoy 1999;Barnes-Schuster, Bassok, and Anupindi 2006;Lutze and Özer 2008;Kim 2011;Kremer and Van Wassenhove 2014;Kim, Park, and Shin 2014;Knoblich, Heavey, and Williams 2015;Shen, Choi, and Minner 2019). The publications typically assume enough supply to fulfil the total of the demand of the customer and do not consider the possibility of a structural bias in the ADI information provided by the customer.…”

Quantitative analysis of semiconductor supply chain contracts with order flexibility under demand uncertainty: A case study

“…Furthermore they note that service level should be maintained at least at a certain level to keep customers loyal. Kim (2011) analyzed a quantity flexibility contract between a customer and a supplier, and demonstrated the supplier's trade-off between the customer service level and the inventory risk. Whereas for the customer, the benefit keeps increasing and then remains constant as the flexibility rate increases.…”

“…While in Kim (2011), the customer demand signal was modeled as a stochastic process without any bias, experience recorded in the case company indicates substantial periods of demand signal bias with over-and underordering. Thus in the present work the demand signal is subject to forecast error, which is explicitly modeled with an over or under planning bias to reflect reality.…”