Analysis of a two stage supply chain with investment in product and process innovation

Abstract

We analyze a two-stage supply chain consisting one contract manufacturer (CM) and one original equipment manufacturer (OEM). The CM provides a single technology related product to the OEM who faces e ort-dependent random demand. CM and OEM will make two di erent investments for product and process research and development (R&D). In this model, it is assumed that process innovation decreases the average cost of production and product innovation increases the demand stochastically. The centralized solution is characterized in which a single decision maker controls the whole system and an algorithm is proposed to nd the centralized optimal solution.The e ect of the parameters on decision variables is monitored by a numerical study. Then we analyze the model from a decentralized point of view. Furthermore, we analyze a revenue sharing contract under di erent settings and focus on di erent decision makers in the supply chain while searching for coordination. It is shown that the revenue sharing contract fails to coordinate the supply chain actions under di erent scenarios where the decision of investment given by the OEM or the CM. We also study the same problem under a budget constraint on investments. We propose an algorithm to nd the centralized optimal solution for the budget constrained problem. Finally, we analyze the same problem under decentralized settings to nd a Nash equilibrium investments and provide a computational study to gain more insight about the problem.