Power Structure and Profitability in Assemble-to-Order Supply Chains

This paper studies the impact of supply chain power structure on firms' profitability in an Assemble-to-Order (ATO) system with one assembler and two component suppliers. Between the assembler and each of its suppliers, either the supplier has dominating power and acts as the Stackelberg leader to set the wholesale price, or the assembler is the more powerful player and dictates the wholesale price paid to the supplier. Recognizing that besides the ability to set the wholesale price, a firm may or may not possess the power to determine the production quantity, we consider two power regimes - one is such that a firm is called powerful if he has the ability to decide both the price and the quantity, and the other regime is one that a firm is considered powerful if he only has the ability to decide the price. Tallying the power positions of the three firms in the system, for each power regime we consider three power structure scenarios for the ATO system and investigate firms' preference of power position. Consistent with the conventional wisdom, we find that under both regimes when the assembler is the most powerful firm among the three, the system-wide total profit is the highest and so is the assembler's profit. The more interesting find is that, if the assembler is not the most powerful player in the system, more power does not necessarily guarantee her a higher profit. Further, a supplier's profit also does not necessarily increase with the power he has. This contrasts with the conclusion for serial systems in which a firm always prefer more power to generate higher profit. In the ATO system, whether it is beneficial for a firm to possess more power depends system parameters. Besides the firms' preference of power, we also find that when both the suppliers are more (less) powerful than the assembler, it can be beneficial (indifferent) for everyone to have the two suppliers merge into a mega supplier and make decisions jointly