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Quantity Flexibility Contracts and Supply Chain Performance

Author

Listed:
  • A. A. Tsay

    (Department of Operations & Management Information Systems, Leavey School of Business, Santa Clara University, Santa Clara, California 95053-0382)

  • W. S. Lovejoy

    (School of Business Administration, University of Michigan, Ann Arbor, Michigan 48109-1234)

Abstract

The Quantity Flexibility (QF) contract is a method for coordinating materials and information flows in supply chains operating under rolling-horizon planning. It stipulates a maximum percentage revision each element of the period-by-period replenishment schedule is allowed per planning iteration. The supplier is obligated to cover any requests that remain within the upside limits. The bounds on reductions are a form of minimum purchase commitment which discourages the customer from overstating its needs. While QF contracts are being implemented in industrial practice, the academic literature has thus far had little guidance to offer a firm interested in structuring its supply relationships in this way. This paper seeks to address this need, by developing rigorous conclusions about the behavioral consequences of QF contracts, and hence about the implications for the performance and design of supply chains with linkages possessing this structure. Issues explored include the impact of system flexibility on inventory characteristics and the patterns by which forecast and order variability propagate along the supply chain. The ultimate goal is to provide insights as to where to position flexibility for the greatest benefit, and how much to pay for it.

Suggested Citation

  • A. A. Tsay & W. S. Lovejoy, 1999. "Quantity Flexibility Contracts and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, vol. 1(2), pages 89-111.
  • Handle: RePEc:inm:ormsom:v:1:y:1999:i:2:p:89-111
    DOI: 10.1287/msom.1.2.89
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    File URL: http://dx.doi.org/10.1287/msom.1.2.89
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    References listed on IDEAS

    as
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