Component Procurement Strategies in Decentralized Assemble-to-Order Systems with Time-Dependent Pricing

We consider a contract manufacturer who procures multiple components from independent suppliers to produce an assemble-to-order customized product for a client. The unit price of the product depends on the manufacturer’s delivery lead time. We explore how the manufacturer can use a “Vendor Managed Consignment Inventory (VMCI)” scheme to manage the underlying risk and coordinate independent suppliers’ decisions on the production quantities of their components under demand uncertainty. We formulate the problem as a Stackelberg game played by the manufacturer against her component suppliers to determine her pricing policy for suppliers’ consignment inventories. This game embeds a sub-game played by the component suppliers against each other to choose their individual production quantities. We show that while numerous equilibria may exist for the suppliers’ sub-game, there is always a unique one that is Pareto-optimal. We develop an efficient algorithm for finding suppliers’ Pareto-optimal equilbrium and then derive manufacturer’s optimal pricing scheme. Our results provide useful insights for managing components in these types of assemble-to-order environments and for understanding how demand uncertainty and component procurement lead times affect individual firms’ performance in decentralized assembly channels.