IDEAS home Printed from https://ideas.repec.org/a/now/fnttom/0200000087.html
   My bibliography  Save this article

Specific Capacity Investment in Supply Chains With Renegotiation

Author

Listed:
  • Hu, Qiaohai (Joice)

Abstract

A supplier must invest and build specific capacity for its buyer to lower variable production cost long before uncertainties have been resolved. Bearing the upfront capacity and cost-reduction investment costs, the supplier under-builds the specialized capacity and under-invests in cost reduction. To resolve this issue, the supply chain partners often rely on informal agreements plus ex post renegotiation. This paper shows that neither quantity commitment only or price only initial agreement can induce the supplier to invest and build specific capacity at the channelefficient level. The supplier will over-invest but under-build the specific capacity under quantity commitment only contracts, and will under-invest but over-build the specific capacity under priceonly initial contracts. There exists an initial quantity plus price contract or option contract that induces the supplier to build the capacity and invest in cost reduction at the first-best level with or without ex post renegotiation. To improve the channel efficiency, the firms will renegotiate ex post with probability one under the quantity plus contract, but will renegotiate only if realized demand is high so that options are exercised up.

Suggested Citation

  • Hu, Qiaohai (Joice), 2019. "Specific Capacity Investment in Supply Chains With Renegotiation," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 334-348, March.
  • Handle: RePEc:now:fnttom:0200000087
    DOI: 10.1561/0200000087
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1561/0200000087
    Download Restriction: no

    File URL: https://libkey.io/10.1561/0200000087?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Mahesh Nagarajan & Yehuda Bassok, 2008. "A Bargaining Framework in Supply Chains: The Assembly Problem," Management Science, INFORMS, vol. 54(8), pages 1482-1496, August.
    2. Gérard P. Cachon & Martin A. Lariviere, 2001. "Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain," Management Science, INFORMS, vol. 47(5), pages 629-646, May.
    3. Terry A. Taylor & Erica L. Plambeck, 2007. "Simple Relational Contracts to Motivate Capacity Investment: Price Only vs. Price and Quantity," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 94-113, January.
    4. Helper, Susan, 1991. "Strategy and Irreversibility in Supplier Relations: The Case of the U.S. Automobile Industry," Business History Review, Cambridge University Press, vol. 65(4), pages 781-824, January.
    5. Brian Tomlin, 2003. "Capacity Investments in Supply Chains: Sharing the Gain Rather Than Sharing the Pain," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 317-333, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ghoddusi, Hamed, 2019. "Risk Management in Commodity Processing Firms," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 219-239, March.
    2. Kouvelis, Panos & Wu, Xiaole & Xiao, Yixuan, 2019. "A Framework of Hedging Decisions for Supply Chain Partnersts," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 189-200, March.
    3. Chou, Mabel C. & Teo, Chung-Piaw & Zhong, Yuan-Guang, 2019. "Material and Cash Flow in Two-Tier Supply Chain with Trade Credits and Defaults," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 119-134, March.
    4. Guiotto, Paolo & Roncoroni, Andrea, 2019. "Optimal Positioning in the Derivative Market: Review, Foundations, and Trends," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 254-279, March.
    5. Babich, Volodymyr & Hilary, Gilles, 2019. "Blockchain and other Distributed Ledger Technologies in Operations," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 152-172, March.
    6. Qiaohai (Joice) Hu, 2022. "Capital structure and supply chain capacity investment," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2822-2837, July.
    7. Kouvelis, Panos & Dong, Ling & Turcic, Danko, 2019. "Introduction and Conceptual Overview of Contents," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 115-118, March.
    8. Slotnick, Susan A. & Sobel, Matthew J., 2019. "Financial Incentives to Avoid Major Quality Problems in a Supply Chain," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 316-333, March.
    9. Tang, Christopher S. & Yang, S. Alex & Wu, Jing, 2019. "Financing Suppliers under Performance Risk," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 135-151, March.
    10. Secomandi, Nicola, 2019. "Quadratic Hedging of Commodity and Energy Cash Flows," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 240-253, March.
    11. Lucker, Florian & Chopra, Sunil & Seifert, Ralf W., 2019. "Disruption Risk Management in Serial Multi-Echelon Supply Chains," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 398-315, March.
    12. Onur, Boyabatli & Nasiry, Javad & Zhou, Yangfang (Helen), 2019. "Corn, Soybeans or Fallow: Dynamic Farmland Allocation under Uncertainty," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 280-297, March.
    13. Wang, Liao & Yao, David D., 2019. "Data and Risk Analytics for Production Planning," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 201-218, March.
    14. Shang, Kevin, 2019. "Cash Beer Game," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 173-188, March.
    15. Amirmohsen Golmohammadi & Alireza Tajbakhsh & Mohamed Dia & Pawoumodom M. Takouda, 2022. "Effect of timing on reliability improvement and ordering decisions in a decentralized assembly system," Annals of Operations Research, Springer, vol. 312(1), pages 159-192, May.
    16. He, Juan & Ma, Chao & Pan, Kai, 2017. "Capacity investment in supply chain with risk averse supplier under risk diversification contract," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 106(C), pages 255-275.
    17. Andrew M. Davis & Stephen Leider, 2018. "Contracts and Capacity Investment in Supply Chains," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 403-421, July.
    18. Sung-Moon Jung & Shie-Gheun Koh & Young-Jin Kim & Pyung-Hoi Koo, 2023. "Coordinated Supply Contracts for a Two-Echelon Supply Chain under Given Bargaining Powers," Sustainability, MDPI, vol. 15(17), pages 1-19, August.
    19. Onur Kaya & Serra Caner, 2018. "Supply chain contracts for capacity decisions under symmetric and asymmetric information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 26(1), pages 67-92, March.
    20. Özalp Özer & Yanchong Zheng & Kay-Yut Chen, 2011. "Trust in Forecast Information Sharing," Management Science, INFORMS, vol. 57(6), pages 1111-1137, June.

    More about this item

    Keywords

    Risk management; Hedging; Operational risk; Supply chain finance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:now:fnttom:0200000087. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lucy Wiseman (email available below). General contact details of provider: http://www.nowpublishers.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.