Using forecast updates and risk-sharing agreements in a three-echelon supply chain

by 1976- Zhang, Xueyi

iii Originating from a research project on a real-world business situation facing a high-tech company, this dissertation explores coordination schemes that can be used to align the incentives of an original equipment manufacturer (OEM) and its contract manufacturer (CM). The coordination is mediated by information (i.e., demand forecast updates) sharing and risk (i.e., overstock of components) sharing. Three major problems are studied: (1) two-component newsvendor model in which the CM needs to make ordering decisions on two complementary components at two different stages with new demand information being revealed in between; (2) an OEM-CM joint planning problem in which the CM makes its own purchasing decisions while the OEM can influence the CM’s decisions through information-sharing or risksharing mechanisms; and (3) a two-mode problem in which a company can split its freight between a slow mode and a fast mode and needs to improve its shipping decisions using demand forecast updates. The main focus in this dissertation is on the joint planning problem in a three-echelon supply chain with complementary product structure. Two key issues in this research are how to model information sharing and how to characterize risk sharing. In the current literature, bivariate normal (BVN) distribution serves as the prevailing method of modeling demand forecast updates; however, we cannot find general closed-form solutions for the order quantities in the first and second stages in a two-stage problem with this formulation. In order to obtain closed-form solutions, we use a set of two related uniform distributions (U-U) to develop a new model. iv The U-U formulation models demand in the second stage as a uniform random variable whose mean is unknown in the first stage, although its width is known in both stages. We demonstrate that the new model simplifies the solution procedure and is an accurate approximation for the BVN model. To capture risk sharing between the OEM and the CM, we propose a contract arrangement under which the OEM compensates the CM for components that are left over at the end of the selling season. Three contract variants, representing different levels of risk sharing, are considered in this dissertation. Using the U-U model, we first study the CM’s planning problem in isolation and obtain an in-depth understanding of the CM’s ordering behaviors. Under both the BVN and the U-U model, the CM tends to increase the order quantity of the component with a longer lead time if better information becomes available at the second stage. In doing so, the CM can reduce expected shortage and improve its overall position. Then we investigate the OEM-CM joint planning problem based on different combinations of information sharing and risk sharing. A thorough examination of the interaction between information sharing and risk sharing reveals many interesting and useful insights for management. We find that information sharing is not necessarily a substitute for risk sharing. Through information sharing alone, both the OEM and the CM are better off; however, information sharing, when combined with risk sharing under certain agreements, could hurt the OEM’s performance. Finally, we apply the U-U model to the two-mode problem in which a company needs to tradeoff better information against premium shipping rates. Computational results suggest that better information helps to improve both service and cost performance under the U-U model.