Coordination of stocking decisions in an assemble-to-order environment

In this paper we study an assemble-to-order environment involving a short-life-cycle product. The product is sold in two different configurations, each requiring a unique component that must be stocked in advance. Both configurations of the product are assembled on the same equipment which has limited capacity. We assume that the assembly capacity is allocated in such a way as to maximize profit for any given product demands and components availability. The main issue is to determine the appropriate stocking quantities for each of the configuration specific components. We first solve for the optimal stocking policy when the components are produced internally, and then consider the case when the components are procured from external suppliers. We investigate how different forms of contract between the assembler and the component suppliers affects coordination of the supply chain as well as each party’s profit. One particularly interesting phenomenon we discover is that it is possible to coordinate the supply chain with a single-price contract between each supplier and the assembler while awarding all parties positive profit. (Supply Chain Management, Channel Coordination, Assembly Systems)