A Decentralized Assembly System with Component Suppliers of Different Bargaining Power

We analyze a decentralized assembly system with two types of component suppliers: one (commanding suppliers) has strong bargaining power who demands a wholesale price contract and the other (subordinate suppliers) has weak bargaining power who accepts a revenue sharing contract from the assembler. We derive the optimal contracts for both supplier types and study the impact of how the supplier type and the associated component costs can affect the optimal contract parameters. We demonstrate the effect of the bargaining power of the players on their relative profitability in the decentralized assembly system. We further illustrate the impact of component cost reduction and supply base reduction on the profitability of the assembler and component suppliers in the system. Specifically, our results suggest that it would be most beneficial for the assembler to prioritize improvement effort on subordinate suppliers with largest potential amount of component cost reduction. We also provide specific operating conditions under which the assembler can benefit from supply base reduction