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Incentives and Commonality in a Decentralized Multiproduct Assembly System

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  • Fernando Bernstein

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Gregory A. DeCroix

    (School of Business, University of Wisconsin--Madison, Madison, Wisconsin 53706)

  • Yulan Wang

    (School of Management, University of Michigan--Dearborn, Dearborn, Michigan 48128)

Abstract

In this paper, we explore the impact of decentralized decision making on the behavior of multiproduct assembly systems. Specifically, we consider a system where three components (two product specific and one common) are used to produce two end products to satisfy stochastic customer demands. We study the system under both centralized and decentralized decision making. In the decentralized system, we prove that for any set of wholesale prices, there exists a unique Pareto-optimal equilibrium in the suppliers’ capacity game. We show that the assembler’s optimal wholesale prices lie in one of two regions---one leads to capacity imbalance and one does not. We use these results to derive insights regarding the inefficiencies that decentralization can cause in such systems. In particular, several of our findings indicate that outsourcing the management of component supplies may inhibit the use of operational hedging approaches for managing uncertainty.

Suggested Citation

  • Fernando Bernstein & Gregory A. DeCroix & Yulan Wang, 2007. "Incentives and Commonality in a Decentralized Multiproduct Assembly System," Operations Research, INFORMS, vol. 55(4), pages 630-646, August.
    • Handle: RePEc:inm:oropre:v:55:y:2007:i:4:p:630-646
    DOI: 10.1287/opre.1070.0402
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    References listed on IDEAS

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    Cited by:

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    3. Daniel Granot & Shuya Yin, 2008. "Competition and Cooperation in Decentralized Push and Pull Assembly Systems," Management Science, INFORMS, vol. 54(4), pages 733-747, April.
    4. Menezes, Mozart B.C. & Ruiz-Hernández, Diego & Guimaraes, Renato, 2016. "The component commonality problem in a real multidimensional space: An algorithmic approach," European Journal of Operational Research, Elsevier, vol. 249(1), pages 105-116.
    5. Hong Fu & Yongkai Ma & Debing Ni & Xiaoqiang Cai, 2017. "Coordinating a decentralized hybrid push–pull assembly system with unreliable supply and uncertain demand," Annals of Operations Research, Springer, vol. 257(1), pages 537-557, October.
    6. Shi Chen & Hau Lee, 2017. "Incentive Alignment and Coordination of Project Supply Chains," Management Science, INFORMS, vol. 63(4), pages 1011-1025, April.
    7. Ebru K. Bish & Xin Zeng & Juqi Liu & Douglas R. Bish, 2012. "Comparative Statics Analysis of Multiproduct Newsvendor Networks Under Responsive Pricing," Operations Research, INFORMS, vol. 60(5), pages 1111-1124, October.
    8. Kostas Bimpikis & Mihalis G. Markakis, 2016. "Inventory Pooling Under Heavy-Tailed Demand," Management Science, INFORMS, vol. 62(6), pages 1800-1813, June.
    9. Huang, Kwei-Long & Kuo, Chia-Wei & Lu, Ming-Lun, 2014. "Wholesale price rebate vs. capacity expansion: The optimal strategy for seasonal products in a supply chain," European Journal of Operational Research, Elsevier, vol. 234(1), pages 77-85.
    10. Santiago Gallino & Antonio Moreno & Ioannis Stamatopoulos, 2017. "Channel Integration, Sales Dispersion, and Inventory Management," Management Science, INFORMS, vol. 63(9), pages 2813-2831, September.
    11. Fernando Bernstein & A. Gürhan Kök & Lei Xie, 2011. "The Role of Component Commonality in Product Assortment Decisions," Manufacturing & Service Operations Management, INFORMS, vol. 13(2), pages 261-270, August.
    12. Atan, Zümbül & Ahmadi, Taher & Stegehuis, Clara & Kok, Ton de & Adan, Ivo, 2017. "Assemble-to-order systems: A review," European Journal of Operational Research, Elsevier, vol. 261(3), pages 866-879.
    13. Transchel, Sandra, 2017. "Inventory management under price-based and stockout-based substitution," European Journal of Operational Research, Elsevier, vol. 262(3), pages 996-1008.
    14. Fernando Bernstein & Gregory A. DeCroix & Yulan Wang, 2011. "The Impact of Demand Aggregation Through Delayed Component Allocation in an Assemble-to-Order System," Management Science, INFORMS, vol. 57(6), pages 1154-1171, June.
    15. Mahesh Nagarajan & Greys Sošić & Chunyang Tong, 2019. "Dynamic Stable Supplier Coalitions and Invariance in Assembly Systems with Commodity Components," Operations Research, INFORMS, vol. 67(5), pages 1269-1282, September.

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