Price and leadtime competition, and coordination for make-to-order supply chains

Abstract

This paper develops a game theoretic model of a one-manufacturer and one-retailer supply chain facing an outside integrated chain (manufacturer) to study the price and leadtime competition and investigate coordination of the supply chain, where the make-to-order production mode is employed and consumers are sensitive to retail price and leadtime. We find that decentralization of the supply chain increases its leadtime while decreases the rival’s leadtime; and the decentralization increases the retail prices. The existence of the outside competitor raises the leadtime. A higher reservation price or brand differentiation increases the retail prices but decreases the leadtimes; a higher transportation cost or lower leadtime sensitivity increases the retail prices and the leadtimes. The coordination of the supply chain facing integrated rival harms the integrated rival. We design contracts to coordinate the supply chain under leadtime-decision-first scenario and wholesale-price-decision-first scenario, respectively. Further, we find that the sequence of decisions affects the validity of the all-unit quantity discount scheme in coordinating the supply chain.

Introduction

Consumers are becoming more and more heterogeneous. To meet their heterogeneous demands, many firms adopt make-to-order (MTO) mode, such as GE’s CAMCO, and restaurant chains (e.g. McDonald’s). In the MTO environment, besides retail price, delivery time (leadtime) is also an important business strategy. A longer leadtime decreases the market demand due to a higher disutility for consumers. Many MTO firms such as Cat Logistics offer delivery time guarantees (Liu, Parlar, & Zhu, 2007). In short, leadtime decision has become an important marketing strategy. We in this paper study the price and leadtime competition between two supply chains and focus on the interaction between the retail price and the leadtime.

Our work is motivated by MTO settings (e.g., wedding & evening dress, furniture, automobile). A MTO manufacturer makes the product partially based on the consumer’s order specification (say, size, color, style). In the industry, some manufacturers collect the consumers’ orders via retailers while the other manufacturers directly collect the consumers’ orders. Each manufacturer makes the products within a leadtime. Each manufacturer has its own brand. Consumer tastes for different brands are heterogeneous. Each brand has some loyal consumers. Besides loyal consumers, some consumers are switchers who can choose a product from the brands to maximize their utilities. Consumers want the manufacturer to provide the products in a shorter leadtime, while reducing leadtime incurs an extra (capacity) cost for the manufacturer. Each brand has to make the price and leadtime decisions to maximize its profit. Some industrial cases can be found in the automobile industry (e.g. Honda, General Motors, Shanghai GM), restaurant industry (say, Mcdonald’s, KFC), and furniture industry (SNIMAY, Shanzhong Classical Furniture). The existence of outside competitor influences the contract arrangement between the member firms of supply chain (Xiao & Yang, 2009). Traditional coordination models do not consider the effect of the existence of outside rival on coordination mechanisms. This paper will investigate how to coordinate the supply chain when the outside competitor exists.

This paper considers a one-manufacturer and one-retailer supply chain competing with an outside integrated competitor to investigate the price and leadtime competition and coordination mechanisms, where the MTO production mode is employed. The wholesale price contract within the supply chain can be signed after or before making the leadtime decision. Thus, we divide the discussions into two scenarios: the leadtime-decision-first scenario and the wholesale-price-decision-first scenario. By comparing the two scenarios, we can examine the effects of the sequence of decisions on the price and leadtime competition and coordination mechanisms. Under the leadtime-decision-first scenario, the manufacturers quote the leadtimes before offering the unit wholesale price; while the manufacturer announces the unit wholesale price before quoting the leadtimes under the wholesale-price-decision-first scenario. Under the leadtime-decision-first scenario, we design an all-unit quantity discount contract to coordinate the supply chain. We also examine how the factors such as brand differentiation, leadtime sensitivity, and leadtime cost factor affect the price and leadtime competition to generate some interesting managerial insights. Under the wholesale-price-decision-first scenario, we investigate how the supply chain can be coordinated by a two-part-tariff-subsidy (TPTS) contract and examine whether an all-unit quantity discount scheme with a subsidy discount can coordinate the supply chain. In this paper, we obtain some interesting results. For example, (i) a higher reservation price decreases the leadtime while increases the retail price; (ii) the decentralization of the supply chain raises its leadtime while decreases the competitor’s leadtime; and (iii) the sequence of decisions affects the validity of the all-unit quantity discount contract in coordinating the supply chain.

The rest of this paper is organized as follows. Section 2 reviews related literature and Section 3 presents a basic model (the leadtime-decision-first scenario) and considers the decisions of the supply chain without an outside competitor. Section 4 analyzes the equilibrium outcomes and coordination mechanisms in the competitive environment. Section 5 studies the equilibrium outcome and supply chain coordination under the wholesale-price-decision-first scenario. Section 6 concludes with a summary and directions for future research.