Heterogeneous suppliers’ contract design in assembly systems with asymmetric information

We investigate a supply contract design problem in an assembly supply chain in which two heterogeneous suppliers produce complementary products and deliver them to the assembler. One supplier is more reliable and exhibits no supply risk, and the other is less reliable and exhibits supply risk. The assembler is better informed about demand and assembles these two types of components into final products. To elicit the assembler’s truthful report of private information, the more reliable supplier offers a contract to the assembler to determine the components’ quantities and the transfer payment. The less reliable supplier enduring a disruption designs a contract that includes the components’ quantities, the transfer payment and the unit penalty for any delivery shortfall. We study the cases where either supplier moves first and where they move simultaneously under symmetric and asymmetric demand information. We explore the values of the assembler’s information and find that the first mover is more reliant upon the existence of less asymmetric information and the second mover benefits more from the assembler’ information. Further, we find that a low reliability of the less reliable supplier enlarges the first mover’s value of information. We also examine the values of the contracting sequence and find that under symmetric information, the first mover benefits more from sequential contracting. However, interestingly, under asymmetric information, the first mover may benefit or be harmed by the first-mover right. We also find that a low reliability of the less reliable supplier discourages the supplier from using the first-mover right.