Contracting and procurement mechanisms in supply chain: applications with new complexities

This dissertation focuses on three major topics: (1) Commodity procurement in cash constrained supply chain (the first essay coauthored with Panos Kouvelis and Danko Turcic); (2) Contract enforceability and capacity investment in supply chains (co-work with Fuqiang Zhang and Tianjun Feng) and finally (3) Optimal component procurement mechanism in multi-tier supply chains (co-work with Panos Kouvelis and Fuqiang Zhang). The first part of my dissertation focuses on commodity and capacity procurement in a cash-constrained supply chain in which a manufacturer sources its parts from a supplier. Both firms rely on credit, require commodity inputs, and face some operational and financial frictions. Although both firms are risk-neutral, we demonstrate that the value of hedging in commodity procurement depends on the nature of the supply chain and on the contracting mechanism. In a decentralized supply chain, where the seller makes the buyer a take-it-or-leave-it offer, we find that hedging either increases supply chain efficiency or wholesale prices, hedging benefits the hedgers trading partner, and that it might be counterproductive to the hedger. The insight that the hedger may be worse off with hedging, however, fails to carry over to the case where the seller and the buyer adopt a Nash bargaining equilibrium. Moreover, in the take-it-or-leave-it setting, we find that the potential negative impact of hedging on the hedgers payoff can be greatly mitigated by the use of a pass-through contract. Under such contract, the downstream firm assumes full responsibility for purchasing and hedging the commodity inputs for the entire supply chain. The empirical implication of this finding is that the downstream firm has an economic incentive to hedge and coordinate raw material procurement in the entire cash-constrained supply chain. In the second part of my dissertation, we study the effect of enforceability of procurement contracts (double moral hazard) on capacity procurement and risk allocation between a buyer and its supplier where capacity cost is supplier's private information. We show that buyer's optimal contract and capacity risk allocations depend critically on a ratio that we called modified reversed hazard rate of the supplier's cost distribution. We study the value of contract enforceability and interestingly show that under certain conditions a simple pull contract with an easily determined unit price is the optimal contract that can be offered by the buyer. This result provides a new explanation for the prevalence of pull contracts in practice. And finally the last chapter of my dissertation studies delegation vs. control of part procurement in a three-tier supply chain. We model two competing OEMs that produce substitutable products and procure similar parts from a component manufacturer (CM) which needs a key component to produce these parts. OEMs can delegate key component procurement to their CM or control CMs procurement. We identify two different contracting power relationships (regimes) in supply chain and characterize sub-game perfect equilibrium under these regimes: supplier Stackelberg regime, where supplier is the Stackelberg leader in pricing game and OEMs Stackelberg regime, where OEMs are the first mover. Under supplier Stackelberg regime, We find that in a symmetric model all firms are indifferent between delegation and control of key part procurement but in an asymmetric case, the smaller OEM prefers to control CMs key part procurement while the larger OEM gets worse off. Under OEMs Stackelberg regime, we show that when downstream competition is high, i.e., when products are close substitutes, both OEMs prefer to directly contract with supplier to control key component procurement. Interestingly, in equilibrium consumer surplus is independent of contracting power distribution in supply chain.