This Article Full Text (PDF) e-companion References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Bernstein, F. Articles by Wang, Y. Search for Related Content

Incentives and Commonality in a Decentralized Multiproduct Assembly System

Fuqua School of Business, Duke University, Durham, North Carolina 27708
School of Business, University of Wisconsin–Madison, Madison, Wisconsin 53706
School of Management, University of Michigan–Dearborn, Dearborn, Michigan 48128
fernando{at}duke.edu
gdecroix{at}bus.wisc.edu
yulanw{at}umd.umich.edu

In this paper, we explore the impact of decentralized decision making on the behavior of multiproduct assembly 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. We study the system under both centralized and decentralized decision making. In the decentralized system, we prove that for any set of 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. We use these results to derive insights regarding the inefficiencies that decentralization can cause in such systems. In particular, several of our findings indicate that outsourcing the management of component supplies may inhibit the use of operational hedging approaches for managing uncertainty.

Subject classifications: games; group decisions; noncooperative; inventory; production; multi-item; echelon; stage; uncertainty; stochastic.
History: Received December 2004; revision received April 2006; accepted June 2006.

This article has been cited by other articles:

				X. Fang, K. C. So, and Y. Wang Component Procurement Strategies in Decentralized Assemble-to-Order Systems with Time-Dependent Pricing Management Science, December 1, 2008; 54(12): 1997 - 2011. [Abstract] [PDF]

				D. Granot and S. Yin Competition and Cooperation in Decentralized Push and Pull Assembly Systems Management Science, April 1, 2008; 54(4): 733 - 747. [Abstract] [PDF]