Revenue‐Sharing vs. Wholesale‐Price Contracts in Assembly Systems with Random Demand

TLDR

Decentralized supply chains, such as assembly and kitting operations, require coordination through incentives, especially under demand uncertainty and strategic uncertainty in vendor‑managed inventory scenarios. The study investigates two distinct assembler‑supplier arrangements—vendor‑managed inventory with revenue sharing and wholesale‑price contracts—and examines their impact on component delivery equilibrium and expected profits. The authors model a vendor‑managed inventory scheme with revenue sharing, a revenue‑plus‑surplus‑subsidy incentive, and a wholesale‑price contract (with and without buybacks) to analyze component delivery quantities and channel coordination. They find optimal revenue shares that maximize assembler profits, demonstrate that the two‑parameter revenue‑plus‑surplus contract coordinates the channel and raises all parties’ profits, and show that wholesale‑price‑only performance deteriorates as supplier count rises, unlike revenue‑share‑only contracts.

Abstract

Assembly and kitting operations, as well as jointly sold products, are rather basic yet intriguing A 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.