Competitive Capacity and Price Decisions for Two Build-to-Order Manufacturers Facing Time-Dependent Demands | IEEE Journals & Magazine | IEEE Xplore

Competitive Capacity and Price Decisions for Two Build-to-Order Manufacturers Facing Time-Dependent Demands


Abstract:

This paper develops game-theoretic models to investigate the optimal competitive capacity-price decisions for two build-to-order manufacturers when they face the disrupti...Show More

Abstract:

This paper develops game-theoretic models to investigate the optimal competitive capacity-price decisions for two build-to-order manufacturers when they face the disruption of a random demand surge. Both manufacturers have their fixed capacity and pricing decisions for the low-demand period. When there is a sudden demand increase, they can temporally acquire extra capacity and change their pricing decisions. Our goal is to determine the optimal joint capacity and pricing decisions for both low- and high-demand periods. We show that there exists a unique subgame perfect Nash equilibrium that is affected by the distribution of the disrupted amount of demand, the duration of the demand change, the market scale, the unit production cost, and the subcontracting cost. The recommendations on how and when the manufacturers should strategically increase their profits by adjusting their capacities and prices are provided. We also find that the demand disruption largely influences the motivation of the manufacturers to acquire capacity information when the cost of acquiring capacity information is considered. The effects of capacity and pricing competition are investigated. Insights are generated, and future research directions are outlined.
Page(s): 583 - 595
Date of Publication: 18 December 2009

ISSN Information:


I. Introduction

Capacity planning and pricing decisions are crucial for any manufacturing system. These two controls affect not only the efficiency and effectiveness of the manufacturer but also the long-term competitiveness of the respective supply chain system. To cope with demand increase, a manufacturer often reserves a certain amount of buffer capacity during the low-demand period. However, this buffer capacity is expensive and directly implies a burden to the manufacturer. Thus, how to balance the tradeoff between having insufficient capacity in some periods and excessive capacity in other periods is an important topic in production research. Essentially, it is well reported that when the demand becomes larger than the normal in-house capacity, a manufacturer can usually take the approach of acquiring temporary capacity, e.g., from the spot market or using subcontractors [1]. Although acquiring the temporary capacity (per unit time) is usually more expensive than having the normal in-house capacity (per unit time), it is still beneficial to use such temporary capacity for a short period compared to the cost of owning it for a long time. This business practice is very well supported by the apparel manufacturing industry in Asia. It is known that many apparel manufacturers in Asia are horizontally integrated and that they share (and trade) capacity from time to time under their strategic partnership. Essentially, when one manufacturer receives an order for a fashionable item that requires more capacity than its normal one, it can pay and get extra capacity from another manufacturer. In addition, Li and Fung, a renowned trading enterprise for apparel supply chains, is known to provide services for retailers to secure production, and it also helps in coordinating with multiple manufacturers to work together for fulfilling orders. This is particularly important when the retailer observes a sudden increase of consumer demand and requires an emergency order from the manufacturers. Li and Fung can help by making sure that the manufacturers can react smoothly to this kind of demand disruption within the required lead time [44].

References

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