Valuing quantity flexibility under supply chain disintermediation risk

Isik Bicer, V Hagspiel

Research output: Contribution to journalArticleAcademicpeer-review

18 Citations (Scopus)

Abstract

We consider a supply chain with one supplier and one retailer in which the parties develop a quantity flexibility contract to specify the conditions of procurement activities. The contract allows the retailer to adjust the initial order quantity after the partial or full resolution of demand uncertainty, which helps the retailer reduce supply–demand mismatches. We use the multiplicative martingale model of forecast evolution to analyze the impact of lead-time reduction on the value of quantity flexibility for the retailer. We find that the shorter the lead time, the higher the value of quantity flexibility. Quantity flexibility may, however, also cause supply chain disintermediation problems for the retailer, such as the supplier bypassing the retailer and selling its products directly to end customers. We incorporate the “contracts as reference points” theory into our quantity flexibility contract model to capture the impact of supply chain disintermediation on the retailer's profit. This approach allows us to analyze the trade-off between decreasing supply–demand mismatches and increasing supply chain disintermediation problems. We show that the impact of lead-time reduction on decreasing the disintermediation risk highly depends on the critical fractile. We also find that the supplier's cost structure has a significant effect on the trade-off. When the supplier's initial investment cost is relatively low, the disintermediation problems become less important.
Original languageEnglish
Pages (from-to)1-15
Number of pages15
JournalInternational Journal of Production Economics
Volume180
DOIs
Publication statusPublished - 2016
Externally publishedYes

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