Supply Chain Coordination with Service-Dependent Contract Termination

To avoid such shortages a manufacturer can incentivize her suppliers to develop sufficient costly capacity. To provide strong incentives, a manufacturer may develop a long-term relationship with her supplier. We model this relation as a repeated Stackelberg game in which the manufacturer is the natural leader. After each epoch, corresponding to one generation of the product, the manufacturer decides on her supplier for the next product generation. We compare the case in which this decision takes into account performance of the current supplier to the case where it is not affected by performance and evaluate the effect on individual and supply chain profits. We show that, especially when the supplier has a high valuation of future profits, long-term relationships based on supplier performance can improve supply chain coordination.

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