Pricing and ordering decisions in a supply chain with downward substitution and imperfect process yield

Chung-Chi Hsieh, Hsing Hua Lai

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We consider a manufacturer sourcing from two suppliers of asymmetric component quality and producing a quality-differentiated product, namely a low- and high-quality version, with each having deterministic demand. The manufacturer adopts the existing process to produce low-quality products with components from the supplier with low component quality, and develops a new process to produce high-quality products with components from the supplier with high component quality. The new process has imperfect yield, and products that do not meet the specifications for high-quality products can substitute for low-quality products produced with the existing process. We investigate the suppliers’ price decisions and the manufacturer's ordering and production decisions in a game-theoretical model under dual sourcing. Our analyses reveal that increasing product differentiation or higher yield of high-quality products do not necessarily translate to a higher profit for the manufacturer. In light of the manufacturer's sourcing strategies, we show that sourcing from a single supplier with high- and low-quality components yields a lower profit than sourcing from one supplier with high component quality and the other with low component quality. Finally, we investigate the manufacturer's decision-making with endogenous yield rate of high-quality products. Our analyses demonstrate that the manufacturer benefits from setting the yield rate of high-quality products ahead of the suppliers’ price decisions.

Original languageEnglish
JournalOmega (United Kingdom)
DOIs
Publication statusPublished - 2019 Jan 1

Fingerprint

Pricing
Substitution
Supply chain
Product quality
Suppliers
Sourcing
Profit
Product differentiation
Differentiated products
Sourcing strategy
Decision making
Dual sourcing
Substitute

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research
  • Information Systems and Management

Cite this

@article{be3d7bd9f6cd4117a037d1830208bd5a,
title = "Pricing and ordering decisions in a supply chain with downward substitution and imperfect process yield",
abstract = "We consider a manufacturer sourcing from two suppliers of asymmetric component quality and producing a quality-differentiated product, namely a low- and high-quality version, with each having deterministic demand. The manufacturer adopts the existing process to produce low-quality products with components from the supplier with low component quality, and develops a new process to produce high-quality products with components from the supplier with high component quality. The new process has imperfect yield, and products that do not meet the specifications for high-quality products can substitute for low-quality products produced with the existing process. We investigate the suppliers’ price decisions and the manufacturer's ordering and production decisions in a game-theoretical model under dual sourcing. Our analyses reveal that increasing product differentiation or higher yield of high-quality products do not necessarily translate to a higher profit for the manufacturer. In light of the manufacturer's sourcing strategies, we show that sourcing from a single supplier with high- and low-quality components yields a lower profit than sourcing from one supplier with high component quality and the other with low component quality. Finally, we investigate the manufacturer's decision-making with endogenous yield rate of high-quality products. Our analyses demonstrate that the manufacturer benefits from setting the yield rate of high-quality products ahead of the suppliers’ price decisions.",
author = "Chung-Chi Hsieh and Lai, {Hsing Hua}",
year = "2019",
month = "1",
day = "1",
doi = "10.1016/j.omega.2019.04.007",
language = "English",
journal = "Omega",
issn = "0305-0483",
publisher = "Elsevier BV",

}

TY - JOUR

T1 - Pricing and ordering decisions in a supply chain with downward substitution and imperfect process yield

AU - Hsieh, Chung-Chi

AU - Lai, Hsing Hua

PY - 2019/1/1

Y1 - 2019/1/1

N2 - We consider a manufacturer sourcing from two suppliers of asymmetric component quality and producing a quality-differentiated product, namely a low- and high-quality version, with each having deterministic demand. The manufacturer adopts the existing process to produce low-quality products with components from the supplier with low component quality, and develops a new process to produce high-quality products with components from the supplier with high component quality. The new process has imperfect yield, and products that do not meet the specifications for high-quality products can substitute for low-quality products produced with the existing process. We investigate the suppliers’ price decisions and the manufacturer's ordering and production decisions in a game-theoretical model under dual sourcing. Our analyses reveal that increasing product differentiation or higher yield of high-quality products do not necessarily translate to a higher profit for the manufacturer. In light of the manufacturer's sourcing strategies, we show that sourcing from a single supplier with high- and low-quality components yields a lower profit than sourcing from one supplier with high component quality and the other with low component quality. Finally, we investigate the manufacturer's decision-making with endogenous yield rate of high-quality products. Our analyses demonstrate that the manufacturer benefits from setting the yield rate of high-quality products ahead of the suppliers’ price decisions.

AB - We consider a manufacturer sourcing from two suppliers of asymmetric component quality and producing a quality-differentiated product, namely a low- and high-quality version, with each having deterministic demand. The manufacturer adopts the existing process to produce low-quality products with components from the supplier with low component quality, and develops a new process to produce high-quality products with components from the supplier with high component quality. The new process has imperfect yield, and products that do not meet the specifications for high-quality products can substitute for low-quality products produced with the existing process. We investigate the suppliers’ price decisions and the manufacturer's ordering and production decisions in a game-theoretical model under dual sourcing. Our analyses reveal that increasing product differentiation or higher yield of high-quality products do not necessarily translate to a higher profit for the manufacturer. In light of the manufacturer's sourcing strategies, we show that sourcing from a single supplier with high- and low-quality components yields a lower profit than sourcing from one supplier with high component quality and the other with low component quality. Finally, we investigate the manufacturer's decision-making with endogenous yield rate of high-quality products. Our analyses demonstrate that the manufacturer benefits from setting the yield rate of high-quality products ahead of the suppliers’ price decisions.

UR - http://www.scopus.com/inward/record.url?scp=85065247405&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85065247405&partnerID=8YFLogxK

U2 - 10.1016/j.omega.2019.04.007

DO - 10.1016/j.omega.2019.04.007

M3 - Article

AN - SCOPUS:85065247405

JO - Omega

JF - Omega

SN - 0305-0483

ER -