Production and Operations Management

Vol. 13, No. 1, Spring 2004, pp. 23–33 issn 1059-1478 04 1301 023$1.25

© 2004 Production and Operations Management Society

Revenue-Sharing vs. Wholesale-Price Contracts in Assembly Systems with Random Demand
Yigal Gerchak • Yunzeng Wang
Department of Industrial Engineering, Tel-Aviv University, Tel-Aviv 69978, Israel Department of Operations, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106-7235

ssembly and kitting operations, as well as jointly sold products, are rather basic yet intriguing decentralized supply chains, where achieving coordination through appropriate incentives is very important, especially when demand is uncertain. We investigate two very distinct types of arrangements between an assembler/retailer and its suppliers. One scheme is a vendor-managed inventory with revenue sharing, and the other a wholesale-price driven contract. In the vmi case, each supplier faces strategic uncertainty as to the amounts of components, which need to be mated with its own, that other suppliers will deliver. We explore the resulting components’ delivery quantities equilibrium in this decentralized supply chain and its implications for participants’ and system’s expected profits. We derive the revenue shares the assembler should select in order to maximize its own profits. We then explore a revenue-plus-surplus-subsidy incentive scheme, where, in addition to a share of revenue, the assembler also provides a subsidy to component suppliers for their unsold components. We show that, by using this two-parameter contract, the assembler can achieve channel coordination and increase the profits of all parties involved. We then explore a wholesale-price-driven scheme, both as a single lever and in combination with buybacks. The channel performance of a wholesale-price-only scheme is shown to degrade with the number of suppliers, which is not the case with a revenue-share-only contract....