Response time and vendor-assembler relationship in a supply chain

Relationships between an assembler and a vendor in a supply chain are investigated in two-period models when the assembler wants to reduce response time by incentive systems. The assembler may offer myopic or farsighted incentive contracts to the vendor, under short-term or long-term relationships. Incentive schemes, effort levels, and expected payoffs under different perspectives and relationships are examined. We find that a farsighted assembler provides the vendor with a higher incentive than a myopic assembler in the first period. A long (short)-term relationship is preferred if the value of farsightedness under a long-term relationship is greater (less) than the switching option value under a short-term relationship. We propose several sufficient conditions regarding which perspectives and relationships are preferred. 2006 Elsevier B.V. All rights reserved.