Contract design for risk sharing partnerships in manufacturing
AbstractThe development of extensive partnerships with suppliers has become a characteristic of manufacturing, particularly in the aircraft and automobile industries. This paper considers the development of appropriate contracts that enable market risks to be shared between the lead manufacturer and the partners. It is shown that it is usually appropriate to have threshold contracts, i.e., contracts where a partner only shares in profits if sales exceed a value determined by risk tolerance and target return. The value of having financial partners as well as manufacturing partners is demonstrated, although it is also shown that financial partner contributions to the project should be limited. We also consider the situation where partners have pre-existing commitments to other projects, perhaps with competitors. The producers sales may be correlated with the partners profits on pre-existing commitments so the impact on contract structure is explored. It is shown that even if a partner had preexisting commitments whose profit is positively correlated with product sales then it is often beneficial to use such a partner.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal European Journal of Operational Research.
Volume (Year): 218 (2012)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/eor
Supply chain management; Production; Risk-sharing; Contracts;
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statistics
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.