A Study on the Coordination of Decentralized Supply Chain: Outsourcing Decision Making and Contracting with Group Buying Mechanism

A decentralized supply chain is a network consists of multiple decision makers with different information and incentives. Due to globalization and outsourcing, decentralized supply chains are prevalent today. Generally, the two significant steps in a decentralized supply chain involve the buyers’ selection of suppliers to provide inputs or to outsource the end-product and contract design for the optimization of the supply chain performance by specifying how buyers and suppliers are working together. Our research is inspired and conducted from these two perspectives and we present three separate work regarding manufactures’ outsourcing supplier selection with quality concern, the effect of learning-by-doing to manufacturers’ outsourcing decision and supply chain coordination through a combination of buyback contract and group buying selling mechanism respectively in this thesis.

When facing limited production capacity and unsatisfied demand from downstream customers, conventionally, the original equipment manufacturer (OEM) would address the problem by relying on capacity expansion or outsourcing to external suppliers to address this problem. Capacity expansion generally incurs a high investment cost and requires long preparation time, which often makes outsourcing a more attractive alternative. Outsourcing, however, is risky due to uncertain quality and costs of suppliers that could affect the downstream demand in the follow-up periods. In the first work we present, we formulate a quality-driven demand function and construct a finite-horizon dynamic model to explore how the quality of external suppliers affect the OEM’s outsourcing strategy as well as the retailer’s demand. We propose simple and efficient algorithms for the OEM to select suppliers in a dynamic setting, and we also offer some managerial insights that are obtained from a set of numerical studies.

An introduction of learning-by-doing is introduced based on the OEM’s outsourcing problem in the second work we present. Both the OEM and the supplier obtain cost reduction, quality improvement or even capacity increase through volume-based learning. We construct a two-period model where both the OEM and the supplier’s 1st period manufacturing experiences can be transferred for cost reduction and quality-improvement in the 2nd period. This work is currently in the proposal stage that will be studied extensively.

Under group buying strategy, a retailer offers buyers price discount based on buyers’ aggregate purchase quantity. The third work studies the supply chain coordination issue with a supplier and a retailer that uses group mechanisms when selling to customers. We demonstrate that a buyback contract can coordinate the supply chain under group buying, and how its contract terms critically depend on the quantity threshold above which group buying deal is activated. With globalization and competitive pressure on specialization, outsourcing has become prevalent in many industries.

Many thanks to Yanni’s Dissertation Committee: Committee Chair: Seung-Lae Kim, Ph.D., Professor of Decision Sciences and MIS Committee Member: Min Wang, Ph.D., Assistant Professor of Decision Sciences Committee Member: Wenjing Shen, Ph.D., Associate Professor of Decision Sciences and MIS Committee Member: Hande Benson, Ph.D., Associate Professor of Decision Sciences and MIS Committee Member: Konstantinos Serfes, Ph.D., Professor of Economics