Risk Ownership in Contract Manufacturing

We consider a supply chain where a contract manufacturer (CM) serves a number of original equipment manufacturers (OEMs). Investment into productive resources is made before demand realization, hence the supply chain faces the risk of underor over-investment. The CM and the OEMs differ in their forecast accuracy and in their resource pooling capabilities, leading to a disparity in their ability to minimize costs due to demand uncertainty. We consider two scenarios in which this risk is borne by the OEM and the CM, respectively, and a third one in which both parties incur some risk. We investigate which party should bear the risk so that maximum supply chain profits are achieved. Furthermore, we assess whether the parties benefit from operating under the scenario that maximizes the total supply chain profit, and investigate the effectiveness of premium-based schemes.