Direct supply base reduction in a decentralized assembly system with suppliers of varying market power

This paper studies a decentralized assembly system with two types of independent component suppliers: one type, so-called commanding suppliers, has strong market power and sets the component price in a push contract offered to the assembler; the other type, subordinate suppliers, has weak market power and accepts a pull contract with the component price set by the assembler. We analyze how direct supply base reduction of component suppliers through supplier clustering can affect the profitability of the assembler and the component suppliers, and we show that direct supply base reduction through clustering of commanding suppliers is generally beneficial to the assembler. Direct supply base reduction through clustering of subordinate suppliers also benefits the assembler, except when the clustering would add another commanding supplier to the system. In that case, our numerical results show that such clustering would likely improve the assembler’s profitability when a product’s profit margin is low and when clustering yields a reduction in the assembler’s coordination costs. We also give sufficient conditions under which direct supply base reduction through supplier clustering benefits also the suppliers involved in the clustering.