Better to Bend than to Break: Sharing Supply Risk Using the Supply-Flexibility Contract

Problem definition: We analyze a contract in which a supplier who is exposed to disruption risk offers a supply-flexibility contract comprising of a wholesale price and a minimum-delivery fraction (“flexibility” fraction) to a buyer facing random demand. The supplier is allowed to deviate below the order quantity by at most the flexibility fraction. The supplier’s regular production is subject to random disruption, but she has access to a reliable expedited supply source at a higher marginal cost. Academic/practical relevance: Despite the prevalence of supply-flexibility contracts in practice, to the best of our knowledge, there is no previous academic literature examining the optimal design of supply-flexibility contracts. As such, the level of flexibility in practice is usually set on an ad-hoc basis, with buyers typically reluctant to share risk with suppliers. Our analysis of supply-flexibility contracts informs practice in two ways: First, using analytically supported arguments, it educates managers on the effects of their decisions on the economic outcomes. Second, it shows that the supply-flexibility contract benefits both the supplier and the buyer, regardless of which player chooses how supply risk is allocated in the supply chain. Methodology: Non-cooperative game theory, non-convex optimization. Results: We derive the supplier-led optimal contract and show that supply chain efficiency improves relative to the price-only contract. More interestingly, even though the buyer lets the supplier decide how the two share supply risk, profits of both the players increase by the introduction of flexibility into the contract. Further, supply flexibility may be even more valuable for the buyer compared with the supplier. Interestingly, the flexibility fraction is not monotone in supplier reliability and a more reliable supplier may even prefer to transfer more risk to the buyer. The robustness of these findings is established on two extensions: one where we study a buyer-led contract (i.e., the buyer chooses the flexibility fraction) and the other where the expedited supply option is available to both the supplier and the buyer. Managerial implications: The supply-flexibility contract is mutually beneficial for both players and yet retains all the advantages of the price-only contract—it is easy to implement, it requires minimal operational and administrative burden, and there is evidence of the use of such contracts in practice. While our focus is not on supply chain coordination, we note that the combination of two mechanisms—the supply-flexibility contract derived in this paper to share supply risk and a buyback contract to share demand risk—yields a coordinating contract.

Testing Market Power and Welfare Effects in the US Catfish Industry

An empirical specification of the conjectural variations model, which conforms to microeconomic theory, is estimated for the US catfish industry. We find the existence of market power exerted by US catfish processors. Processors force the price paid to catfish growers down by 52.88 cent per pound of live catfish, which costs US catfish growers about $300 million a year. US catfish growers can deter the negative effects of processors’ market power by increasing their farm supply flexibility. Further studies are needed to address the dynamics and competitive game strategies in the US catfish industry.

Enabling supply chain agility through process integration and supply flexibility

Purpose The purpose of this paper is to emphasize the underlying mechanism through which firms can achieve supply chain agility and augment business performance from the vendor’s perspective. Design/methodology/approach Drawing on dynamic capability view and contingency theory, the study conceptualizes a moderated mediation model to investigate the underlying influence of process integration (PI), supply flexibility and product-related complexity on supply chain agility and the subsequent effect of supply chain agility on firm’s business performance. Survey data from a sample of 148 firms, in the garment manufacturing industry, in Pakistan were analyzed using partial least square methods. Findings The results revealed that supply flexibility (i.e. volume and mix) mediates the effect of PI on supply chain agility. Supply chain agility, in turn, influences a firm’s business performance. Furthermore, the competence‒capability framework is not consistent across the varying degrees of product complexity such as product complexity hinders the effect of supply flexibility on supply chain agility, whereas it amplifies the impact of PI on supply chain agility. The conditional indirect effects suggest that the indirect effect of PI on supply chain agility through supply flexibility becomes stronger when product complexity is high. Originality/value The study is novel in the context of an emerging economy to educate fashion vendors to tune their competencies and capabilities to regain the market share in the global market place.

Improving Supply Chain Performance through the Implementation of Supply Flexibility

Objective - This study aims to analyze the impact of supply flexibility on supply chain performance. The rapidlychanging marketdemands have to be faced with a flexible supply chain management in order to reach market acceptance. The key to successful supply chain management also depends on supply flexibility; given that the smooth flow of materials and parts will define the whole manufacture operation. Methodology/Technique - Supply flexibility consists of two variables, namely, supplier flexibility and supply network flexibility.The research was conducted by taking samples from the garment industry in Indonesia. Findings - As a result of this research, it was found that supplier flexibility affects the supply chain performance, while supply network flexibility does not. Novelty - The study suggests that the Indonesian garment industry needs to strengthen the cooperation network with more suppliers so that the relationship can be more flexible to ensure the availability of high quality raw materials and parts at the appropriate prices to maintain the smooth operation of the company. Type of Paper - Empirical Keywords: Supply Chain Performance; Supply Chain Management; Supply Flexibility; Supplier Flexibility; Supply Network Flexibility. JEL Classification: L11, R41.