Coordinating Investment, Production and Subcontracting
نویسنده
چکیده
We value the option of subcontracting to improve Þnancial performance and system coordination by analyzing a competitive stochastic investment game with recourse. The manufacturer and subcontractor decide separately on their capacity investment levels. Then demand uncertainty is resolved and both parties have the option to subcontract when deciding on their production and sales. We analyze and present outsourcing conditions for three contract types: (1) price-only contracts where an ex-ante transfer price is set for each unit supplied by the subcontractor; (2) incomplete contracts, where both parties negotiate over the subcontracting transfer; and (3) state-dependent price-only and incomplete contracts for which we show an equivalence result. While subcontracting with these three contract types can coordinate production decisions in the supply system, only state-dependent contracts can eliminate all decentralization costs and coordinate capacity investment decisions. The minimally sufficient price-only contract that coordinates our supply chain speciÞes transfer prices for a small number (6 in our model) of contingent scenarios. Our game-theoretic model allows the analysis of the role of transfer prices and of the bargaining power of buyer and supplier. We Þnd that sometimes Þrms may be better off leaving some contract parameters unspeciÞed ex-ante and agreeing to negotiate ex-post. Also, a price-focused strategy for managing subcontractors can backÞre because a lower transfer price may decrease the manufacturers proÞt. Finally, as with Þnancial options, the option value of subcontracting increases as markets are more volatile or more negatively correlated.
منابع مشابه
Development of joint maintenance and production strategies in a subcontracting environment
This article, inspired by an industrial problem, develops efficient maintenance and just-in-time production policies in a subcontracting environment according to two orientations. The first invokes subcontracting with the objective of satisfying a constant customer demand knowing that our production system, composed of a machine M1, cannot satisfy the totality of demand. Subcontracting is repre...
متن کاملDecentralized subcontractor scheduling with divisible jobs
Subcontracting allows manufacturer agents to reduce completion times of their jobs and thus obtain savings. This paper addresses the coordination of decentralized scheduling systems with a single subcontractor and several agents having divisible jobs. Assuming complete information, we design parametric pricing schemes that strongly coordinate this decentralized system, i.e., the agents’ choices...
متن کاملPricing Approaches for Investment Companies
The main business of an investment company is to hold and manage securities for investment purposes. In today competitive market Pricing and its methodology are complicated motions. It is very important to define a price that can prevail the competition in an open and free market. In order to define the price certain circumstances should be considered. In the academic arena there have been seve...
متن کاملDeterminants and Impact of Subcontracting: Evidence from India's Informal Manufacturing Sector
There are two divergent perspectives on the impact of subcontracting on firms in the informal sector. According to the benign view, formal sector firms prefer linkages with relatively modern firms in the informal sector, and subcontracting enables capital accumulation and technological improvement in the latter. According to the exploitation view, formal sector firms extract surplus from stagna...
متن کاملCapacity acquisition and subcontracting
The fundamental question encountered in acquiring capacity to meet nonstationary demand over a multi-period horizon is how to balance the tradeoff between having insufficient capacity in some periods and excess capacity in others. In the former situation part of the demand is subcontracted, while in the latter capacity that has been paid for is rendered idle. Capacity and subcontracting decisio...
متن کامل