Diversity of payment contracts in a decentralized assembly system

Conventional wisdom views that in an assembly system, suppliers have to accept a unified payment contract when transacting with a manufacturer. However, in practice, the implementation of a payment contract is clearly more dependent on the channel power of the supplier in the supply chain. This paper considers an assembly system consisting of two suppliers with different channel powers, and identifies three payment contracts, namely, on-delivery payment, on-agreed-time payment, and ready-to-assemble payment. We investigate the equilibrium delivery and timing decisions of firms under three different cases distinguished by the combinations of different payment contracts in the system. Based on both theoretical and quantitative analyses, three major results are obtained. First, the delivery times of suppliers are cost-driven and time-related. Second, the buffer time of the manufacturer can balance the production lead times of the supplier. Third, the supply chain achieves the lowest cost when the core supplier chooses an on-agreed-time payment contract, and the general supplier adopts a ready-to-assemble payment contract.