Decentralized Supply Chain Dynamics and the Quantity Flexibility Contract

In a decentralized supply chain, i.e., one with multiple loci of control, the dependencies between the entities are formalized through contracts. The typical goal is to choose contract forms and values that are beneficial to both the contracting entities. Representation of supply chains at a level sufficient to capture the essential system interactions requires a high-level architecture that combines simulation (SIM) and optimization (OPT) techniques. In this framework, the simulation captures the system-wide uncertainties while the optimization model captures the combinatorial nature of manufacturing decisions. In this paper, we extend the application of the SIM-OPT framework to a two-level decentralized retailer-manufacturer supply chain described in Subramanian V. et al (2005). The application involves the quantity flexibility (QF) contract and its role in mitigating the bullwhip effect, an amplification of demand variability that can arise under certain conditions. In the earlier work, a case study with independent and identically distributed (i.i.d) demand was used to quantify the impact of a series of contract settings on these two entities. Preliminary investigation into the effect of the manufacturing function on the contract was also reported. In the present paper, the contract is explored under the more general case of non-stationary demand. The following features are examined: (i) taking advantage of non-stationary demand, the impact of the contract parameters on the manufacturer are verified (ii) the interaction between manufacturer's process investment decisions and the contract is generalized (iii) further studies into the effect of the production function on the contract are summarized. Through this paper, we continue to demonstrate the use of the SIM-OPT framework in studying decentralized supply chain dynamics, and, in particular, the utility of detailed manufacturing models.