Incentives and Flexibility in a
Decentralized Multi-Product
Assemble-to-Order System
Fernando Bernstein
Durham, NC
In this paper, we explore the
impact of decentralized decision making on the behavior of assemble-to-order
systems. Specifically, we consider a system where three components (two
product-specific and one common) are used to produce two end products to
satisfy stochastic customer demands.
Component capacity decisions must be made before a single selling
season, while end-product assembly decisions are made after observing demands.
We study the system under both centralized and decentralized decision
making. In the latter case, an assembler
chooses wholesale prices to pay three independent suppliers and also makes
end-product production decisions, while the suppliers choose component
capacities. In the decentralized system we prove that, for any wholesale
prices, there exists a unique Pareto-optimal equilibrium in the suppliers'
capacity game. We show that the assembler's optimal wholesale prices lie in one
of two regions – one leads to capacity imbalance and one does not. Similar to
other decentralized supply chain settings, we find that decentralization leads
to understocking in terms of component capacities.
However, we also identify new types of inefficiencies related to the
multi-component, multi-product setting studied here. We find that capacity
imbalance occurs less frequently in the decentralized system, and that its
presence in that system depends on the distributions of end-product demands
(unlike the centralized system). In addition, we demonstrate that in some
situations the wholesale prices in the decentralized system can alter the
assembler's profit margins so that end-product production priorities are
reversed from those in the centralized system. Finally, by comparing the
decentralized system to one where the common component is replaced by two
dedicated components, we find that the apparent flexibility provided by a
common component may actually hurt the assembler's performance in a
decentralized system.