The Use of a Premium-payment Scheme in a Supply Chain Involving Capacity Acquisition | Weatherhead School at Case Western Reserve University

The Use of a Premium-payment Scheme in a Supply Chain Involving Capacity Acquisition

The Use of a Premium-payment Scheme in a Supply Chain Involving Capacity Acquisition

Authors

  • Jian Yang
  • Shitao Yang

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.