A two-period supply contract model for a decentralized assembly system

Supply contract helps in coordinating the supply of quantities from different suppliers in order to meet the demand for a product. In this paper, supply contract models are developed by considering an assembly system operated under a centralized and a decentralized control modes. The centralized control mode considers a single decision maker and offers a global optimal solution. However, the decentralized control mode considers each player in the contract as a decision maker and offers local optimal solutions based on the production and cost characteristics of each player. Such local optimal solutions are adjusted through coordinating parameters to obtain global optimal solutions. If a contract developed for a decentralized control mode achieves the global optimal solution, then the supply chain (or channel) is said to be coordinated. We examine supply contract scenarios by developing a two period contract model for a two-echelon assembly system. We show that contract operating under a decentralized control mode can be coordinated by adjusting both wholesale and buyback prices. A numerical study is also presented to illustrate the applicability of the proposed contract model. (c) 2007 Elsevier B.V. All rights reserved.