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Competition, Cooperation, and Information Sharing in a Two-Echelon Assembly System

Paul Merage School of Business, University of California, Irvine, California 92697-3125
fzhang{at}uci.edu

This paper studies a two-echelon assembly system and explores several important issues in managing decentralized supply chains. First, we investigate the behavior of the assembly system under decentralized control. It is shown that the Nash equilibrium of the competitive assembly system exists but is never system optimal. Next, we examine the role of information in the assembly system. We consider horizontal information sharing on the inventory status between the suppliers and demonstrate when information is valuable from the perspectives of the system and the individual player. We find that information sharing mitigates the system’s competition penalty in some cases, but there are also instances in which information sharing can hurt a decentralized system. Although the manufacturer always prefers information sharing, it is sometimes in the interest of the suppliers to refuse to share information. Finally, we propose a demand-independent coordination scheme for managing decentralized supply chains with either a serial or an assembly structure. The coordination scheme has practical value because very often the firm’s head (or the owner of the supply chain) does not have the accurate demand information that the local managers have. Alternatively, the demand varies over time, and the coordination contracts have to be modified. Under the transfer payment contract, the system optimal policy is the unique Nash equilibrium in the decentralized supply chain. Discussion on the relationship between our coordination scheme and existing methods in the literature is also provided.

Key Words: assembly system; decentralization; information sharing; supply chain coordination
History: Received: March 31, 2004; accepted: February 7, 2006.

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