Abstract
Supplier development is a critical competitive endeavor for organizations and their supply chains. Investigation into this area has increased over the past few years, yet further understanding of suppler development is needed. Specifically, recent supplier development investment practices have shown a shift from standalone actions by organization or supplier to joint actions between organization and suppliers. Faced with this phenomenon, the goal of this paper is to develop a theoretic model based on the Cobb–Douglas production function. The study focuses on determining optimal supplier development investment strategies with respect to joint actions that increase supplier production capability for the benefit of both the focal organization and its suppliers. The supplier development investment strategies mainly refer to joint actions between an organization and multiple suppliers through capital resources (tangible) investments, knowledge (intangible) investments, and sharing cost of capital resources (tangible) investments. Using various game theoretic models, we reveal how supplier development investment strategies and profits of all the members are affected by various buyer-supplier relationships and investment returns to scale reasons. Whether the focal organization (buyer) has any incentives to share cost of capital resources (tangible) investments is also investigated. Our first finding is that supplier development investment activities motivation is derived from increases in supply volume for the “increasing returns to scale” situation, and derives from increasing the organization and suppliers’ marginal profit in the “decreasing returns to scale” situation. Secondly, the cooperative relationship is more economically beneficial to the supply chain, but it also requires more capital resources and knowledge expenditures (investments) than a non-cooperative relationship. Thirdly, through numerical analysis it is found that the cooperative relationship can not obtain Pareto efficiency for all the members of the supply chain when using the Nash bargaining model. Additional gaming insights and implications are also provided from parametric analysis. Opportunities for further research are also presented.
Similar content being viewed by others
Notes
Asset specificity is when a supplier invests in capability development for only a specific customer’s needs.
References
Adida, E., & Perakis, G. (2014). The effect of supplier capacity on the supply chain profit. Annals of Operations Research, 223(1), 1–52. doi:10.1007/s10479-014-1603-9.
Bai, C., & Sarkis, J. (2010a). Integrating sustainability into supplier selection with grey system and rough set methodologies. International Journal of Production Economics, 124(1), 252–264.
Bai, C., & Sarkis, J. (2010b). Green supplier development: Analytical evaluation using rough set theory. Journal of Cleaner Production, 18(12), 1200–1210.
Bai, C., & Sarkis, J. (2011). Evaluating supplier development programs with a grey based rough set methodology. Expert Systems with Applications, 38(11), 13505–13517.
Bai, C. A., & Sarkis, J. (2014). Determining and applying sustainable supplier key performance indicators. Supply Chain Management: An International Journal, 19(3), 5–5.
Bai, C., Sarkis, J., Wei, X., & Koh, L. (2012). Evaluating ecological sustainable performance measures for supply chain management. Supply Chain Management: An International Journal, 17(1), 78–92.
Basar, T., & Olsder, G. J. (1982). Dynamic noncooperative game theory. New York: Academic.
Biehl, M., Cook, W., & Johnston, D. A. (2006). The efficiency of joint decision making in buyer-supplier relationships. Annals of Operations Research, 145(1), 15–34.
Cachon, G. P. (2003). Supply chain coordination with contracts. Handbooks in Operations Research and Management Science, 11, 227–339.
Chan, F. T., & Kumar, N. (2007). Global supplier development considering risk factors using fuzzy extended AHP-based approach. Omega, 35(4), 417–431.
Choi, T. Y., & Wu, Z. (2009). Triads in supply networks: Theorizing buyer–supplier–supplier relationships. Journal of Supply Chain Management, 45, 8–25.
Coase, R. (2006). The conduct of economics: The example of fisher body and general motors. Journal of Economics and Management Strategy, 15(2), 255.
Davis, A. M., & Leider, S. G. (2014). Capacity investment in supply chains: Contracts and the hold-up problem. In Working paper, Cornell University, Ithaca, NY.
Dou, Y., Zhu, Q., & Sarkis, J. (2014). Evaluating green supplier development programs with a grey-analytical network process-based methodology. European Journal of Operational Research, 233(2), 420–431.
Ellram, L. M. (2000). Purchasing and supply management’s participation in the target costing process. Journal of Supply Chain Management, 36, 39–51.
Eng, S. W. L., Chew, E. P., & Lee, L. H. (2014). Impacts of supplier knowledge sharing competences and production capacities on radical innovative product sourcing. European Journal of Operational Research, 232(1), 41–51.
Fishburn, P. (1970). Utility theory for decision making. New York: Wiley.
Friedl, G., & Wagner, S. M. (2012). Supplier development or supplier switching? International Journal of Production Research, 50(11), 3066–3079.
Govindan, K., Kannan, D., & Haq, A. N. (2010). Analyzing supplier development criteria for an automobile industry. Industrial Management & Data Systems, 110(1), 43–62.
Griliches, Z. (1979). Issues in assessing the contribution of research and development to productivity growth. Bell Journal of Economics, 10, 92–116.
Hitt, M. A. (2011). Relevance of strategic management theory and research for supply chain management. Journal of Supply Chain Management, 47(1), 9–13.
Huang, Z., & Li, S. X. (2001). Co-op advertising models in manufacturer-retailer supply chains: A game theory approach. European Journal of Operational Research, 135(3), 527–544.
Humphreys, P., Cadden, T., Wen-Li, L., & McHugh, M. (2011). An investigation into supplier development activities and their influence on performance in the Chinese electronics industry. Production Planning and Control, 22(2), 137–156.
Humphreys, P. K., Li, W. L., & Chan, L. Y. (2004). The impact of supplier development on buyer–supplier performance. Omega, 32, 131–143.
Jaffe, A. B. (1989). Real effects of academic research. The American Economic Review, 79(5), 957–970.
Keeney, R. L., & Raiffa, H. (1976). Decision with multiple objectives: Preferences and value tradeoffs. New York: Wiley.
Krause, D. R., & Ellram, L. M. (1997). Success factors in supplierdevelopment. International Journal of Physical Distribution & Logistics Management, 27(1), 39–52.
Krause, D. R., Handfield, R. B., & Scannell, T. V. (1998). An empirical investigation of supplier development: Reactive and strategic processes. Journal of Operations Management, 17(1), 39–58.
Krause, D. R., Handfield, R. B., & Tyler, B. (2007). The relationships between supplier development, commitment, social capital accumulation and performance improvement. Journal of Operations Management, 25(2), 528–545.
Krause, D. R., Scannell, T. V., & Calantone, R. J. (2000). A structural analysis of the effectiveness of buying firms’ strategies to improve supplier performance. Decision Sciences, 31(1), 33–55.
Leenders, M. R. (1966). Supplier development. Journal of Purchasing, 2(4), 47–62.
Li, S. X., Huang, Z., Zhu, J., & Chau, P. Y. K. (2002). Cooperative advertising, game theory and manufacturer-retailer supply chains. Omega, 30(5), 347–357.
Li, W., Humphreys, P. K., Yeung, A. C. L., & Cheng, T. C. E. (2012). The impact of supplier development on buyer competitive advantage: A path analytic model. International Journal of Production Economics, 135(1), 353–366.
Li, W., Humphreys, P. K., & Yeung, A. C. L. (2007). The impact of specific supplier development efforts on buyer competitive advantage: An empirical model. International Journal of Production Economics, 106(1), 230–247.
Liu, C. L., & Chen, S. L. (2012). Risk sharing in the supplier relations for the Taiwanese automotive industry. Journal of the Operational Research Society, 64(3), 365–371.
Liu, Y., Luo, Yadong, & Liu, T. (2009). Governing buyer–supplier relationships through transactional and relational mechanisms: Evidence from China. Journal of Operations Management, 27, 294–309.
Lovejoy, W. S. (2010). Bargaining Chains. Management Science, 56(12), 2282–2301.
Mahapatra, S. K., Das, A., & Narasimhan, R. (2012). A contingent theory of supplier management initiatives: Effects of competitive intensity and product life cycle. Journal of Operations Management, 30(5), 406–422.
Martínez-de-Albéniz, V., & Simchi-Levi, D. (2013). Supplier–Buyer negotiation games: Equilibrium conditions and supply chain efficiency. Production and Operations Management, 22(2), 397–409.
Modi, S., & Mabert, V. (2007). Supplier development: Improving supplier performance through knowledge transfer. Journal of Operations Management, 25(25), 42–64.
Narasimhan, R., Mahapatra, S., & Arlbjørn, J. (2008). Impact of relational norms, supplier development and trust on supplier performance. Operations Management Research, 1(1), 24–30.
Nobeoka, K., Dyer, J. H., & Madhok, A. (2002). The influence of customer scope on supplier learning and performance in the Japanese automobile industry. Journal of International Business Studies, 33(4), 717–736.
Patrick Rondéa, b, & Hussler, C. (2005). Innovation in regions: What does really matter? Research Policy, 34(8), 1150–1172.
Reiskin, E. D., White, A. L., Johnson, J. K., & Votta, T. J. (1999). Servicizing the chemical supply chain. Journal of Industrial Ecology, 3(2–3), 19–31.
Samaddar, S., & Kadiyala, S. S. (2006). An analysis of interorganizational resource sharing decisions in collaborative knowledge creation. European Journal of Operational Research, 170(1), 192–210.
Soo Kim, J., Il Park, S., & Young Shin, K. (2014). A quantity flexibility contract model for a system with heterogeneous suppliers. Computers & Operations Research, 41, 98–108.
Sting, F. J., & Huchzermeier, A. (2010). Ensuring responsive capacity: How to contract with backup suppliers. European Journal of Operational Research, 207(2), 725–735.
Subhashish, S., & Savitha, S. K. (2006). An analysis of interorganizational resourcesharing decisions in collaborative knowledge creation. European Journal of Operational Research, 170(1), 192–210.
Swinney, R., Cachon, G. P., & Netessine, S. (2011). Capacity investment timing by start-ups and established firms in new markets. Management Science, 57(4), 763–777.
Talluri, S., Narasimhan, R., & Chung, W. (2010). Manufacturer cooperation in supplier development under risk. European Journal of Operational Research, 207(1), 165–173.
Taylor, T. A., & Plambeck, E. L. (2007). Simple relational contracts to motivate capacity investment: Price only versus price and quantity. Manufacturing & Service Operations Management, 9(1), 94–113.
Von Neumann, J., & Morgenstern, O. (1953). Theory of games and economic behavior (3rd ed.). Princeton, NJ: Princeton University Press.
Wagner, S. M. (2006). Supplier development practices: An exploratory study. European Journal of Marketing, 40(5/6), 554–571.
Wagner, S. M., & Krause, D. R. (2009). Supplier development: Communication approaches, activities and goals. International Journal of Production Research, 47(12), 3161–3177.
Wang, S. D., Zhou, Y. W., Min, J., & Zhong, Y. G. (2011). Coordination of cooperative advertising models in a one-manufacturer two-retailer supply chain system. Computers & Industrial Engineering, 61(4), 1053–1071.
Wilhelm, M. M., & Kohlbacher, F. (2011). Co-opetition and knowledge co-creation in Japanese supplier-networks: The case of Toyota. Asian Business & Management, 10, 66–86.
Wu, Z., & Choi, T. Y. (2005). Supplier-supplier relationships in the buyer-supplier triad: Building theories from eight case studies. Journal of Operations Management, 24, 27–52.
Yang, F., Wu, D., Liang, L., Bi, G., & Wu, D. D. (2011). Supply chain DEA: Production possibility set and performance evaluation model. Annals of Operations Research, 185(1), 195–211.
Yao, Z., Leung, S. C. H., & Lai, K. K. (2008). The effectiveness of revenue-sharing contract to coordinate the price-setting newsvendor products’ supply chain. Supply Chain Management: An International Journal, 13(4), 263–271.
Yue, J., Austin, J., Wang, M. C., & Huang, Z. (2006). Coordination of cooperative advertising in a two-level supply chain when manufacturer offers discount. European Journal of Operational Research, 168(1), 65–85.
Acknowledgments
This work is supported by the National Natural Science Foundation of China Project (71102090, 71472031); Program for Liaoning Excellent Talents in University (WJQ2014029).
Author information
Authors and Affiliations
Corresponding author
Appendix: Proof of results
Appendix: Proof of results
1.1 Proof of feasibility conditions
-
(1)
Nash game:
$$\begin{aligned}&\rho _O (\eta x^{*\alpha }y^{*\beta })-x^{*}=\left( {\eta \alpha ^{\alpha }\beta ^{\beta }\rho _O ^{1-\beta }\left( {\sum _{i=1}^n {\rho _{S\,i} } } \right) ^{\beta }} \right) ^{\frac{1}{1-\alpha -\beta }}(1-\alpha )>0\\&\left( {\sum _{i=1}^n {\rho _{S\,i} } } \right) (\eta x^{*\alpha }y^{*\beta })-y^{*}=\left( {\eta \alpha ^{\alpha }\beta ^{\beta }\rho _O ^{\alpha }\left( {\sum _{i=1}^n {\rho _{S\,i} } } \right) ^{1-\alpha }} \right) ^{\frac{1}{1-\alpha -\beta }}(1-\beta )>0 \end{aligned}$$ -
(2)
Stackelberg game:
$$\begin{aligned}&\rho _O (\eta x^{**\alpha }y^{**\beta })-x^{**}-t^{**}y^{**}\\&\quad =\left( \eta \alpha ^{\alpha }\beta ^{\beta }\left( \rho _O +\beta \left( {\sum _{i=1}^n {\rho _{S\,i} } } \right) \right) \right) ^{\frac{1}{1-\alpha -\beta }}(1-\alpha -\beta )>0 \end{aligned}$$ -
(3)
Cooperative game
$$\begin{aligned}&\left( {\rho _O +\sum _{i=1}^n {\rho _{S\,i} } } \right) (\eta \overline{{x}}^{\alpha }\overline{{y}}^{\beta })-\overline{{x}}-\overline{{y}}\\&\quad =\left( {\eta \alpha ^{\alpha }\beta ^{\beta }\left( {\rho _O +\left( {\sum _{i=1}^n {\rho _{S\,i} } } \right) } \right) } \right) ^{\frac{1}{1-\alpha -\beta }}(1-\alpha -\beta )>0 \end{aligned}$$
1.2 Proof of Proposition 5
To arrive at Proposition 5, a relationship proposition on investment quantities for each of the three types of games, we begin by first using expressions (19) to arrive at the following general relationships:
Then we know that the following relationships hold:
From expression (15), we know that the focal organization’s knowledge investment quantity \(x\) positively correlates with the organization’s marginal profit \(\rho _O \). Given this positive correlation, we know that \(x_1^{**} \ge x_2^{**} \). Then, the general relationships for knowledge investment equilibrium quantities is: \(\overline{{x}}>x^{**}>x^{*}\). We also can get \(\overline{{y}}>y^{**}>y^{*}\) with same process.
Rights and permissions
About this article
Cite this article
Bai, C., Sarkis, J. Supplier development investment strategies: a game theoretic evaluation. Ann Oper Res 240, 583–615 (2016). https://doi.org/10.1007/s10479-014-1737-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10479-014-1737-9