Risk Ownership in Contract Manufacturing

Sezer Ülkü; L. Beril Toktay; Enver Yücesan

doi:10.1287/msom.1060.0141

Risk Ownership in Contract Manufacturing

Sezer Ülkü¹; L. Beril Toktay²; Enver Yücesan³

¹ McDonough School of Business, Georgetown University, Washington, D.C. 20057 · ² College of Management, Georgia Institute of Technology, Atlanta, Georgia 30308 · ³ Technology and Operations Management, INSEAD, 77305 Fontainebleau, France

Manufacturing and Service Operations Management 2007

We consider a supply chain where a contract manufacturer (CM) serves a number of original equipment manufacturers (OEMs). Investment into productive resources is made before demand realization, hence the supply chain faces the risk of under- or overinvestment. The CM and OEMs differ in their forecast accuracy and in their resource pooling capabilities, leading to a disparity in their ability to minimize costs due to demand uncertainty. We consider two scenarios in which this risk is borne by the OEM and CM, respectively. We determine which party should bear the risk so that maximum supply chain profits are achieved. We investigate the effectiveness of premium-based schemes in inducing the best party to bear the risk, and conclude that they function well despite information asymmetry when double marginalization is not very high.

DOI: 10.1287/msom.1060.0141
Volume: 9 (3)
Pages: 225-241
Language: en
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