Optimal Supply Chain Formation Using Manufacturers’ Negotiation in the Environment that the Sub-Contracts are Allowable

The level of a service and its cost have a trade-off relation in the supply chain, but most companies aim to achieve both quality service and low cost at the same time by means of effective supply chain management. In an effort to achieve this goal, many researches have been made to minimize the uncertainties related to the supply chain through its effective design and operation. It is noteworthy that the goal of each participant in the supply chain does not lead to the maximization of the efficiency and effectiveness of the supply chain (Lee & Billington, 1992; Towill, 1996). Therefore, the cooperative effort between the members in the supply chain is needed to respond to the customer’s demand effectively. This indicates that the integration concept from the viewpoint of the whole supply chain is necessary. Traditionally, more efforts have been made to remove the imbalance of supply and demand in the production management, generally putting emphasis on reducing a total cost (Bowersox & Closs, 1996). Also, most preceding studies have focused on the flexible organization in the vertical integration as shown in the companies having a controlling power in the supply chain. However, this study has focused on the competitive relations between participants in the horizontal integration instead of the vertical one. In the competitive relations, a certain number of buyers and manufacturers usually make a decision only depending on the price information because of no further information sharing (Bylka, 2003). But manufacturers in the horizontal integration, although they keep a competitive relation between them, are trying to have a strategic cooperation with others by means of sharing information on their order situation. Related to the topic, several research studies have been conducted with concepts such as supply chain collaboration, supply chain coalition, and supply chain configuration. Moyaux et al. (2004) experimented with three levels of collaboration schemes regarding demand information transmission among supply chain members to reduce the bullwhip effect. They adopted game theory with multi-agent simulation and showed that they can reach Nash equilibrium and minimum supply chain cost. Nagarajan and Sosic (2006) reviewed coalition