The Use of a Premium-payment Scheme in a Supply Chain Involving Capacity Acquisition
Authors
Published
European Journal of Operational Research, vol.
181, issue
1, pp.
207-223,
August
2007
Website
http://
www.sciencedirect.com/science/article/pii/S0377221706004231
Abstract
We study a practice whereby a downstream firm makes to his supplier a premium-payment for a certain quantity of products. We show that the adoption of this practice can induce the supplier to build bigger capacity. The higher capacity level enables the supplier to satisfy a larger portion of demands from the downstream firm, and this leads to higher payoffs for both parties in the supply chain. With the assistance of an under-capacity penalty imposed on the supplier, this premium-payment scheme can help lure the parties into taking the channel-optimal actions. Our numerical examples help reveal various features of the scheme.
