The implication of time-based payment contract in the decentralized assembly system

This paper investigates the impact of two time-based payment contracts in an assembly system that consists of one assembler and two suppliers, in which both suppliers’ production times are stochastic. The assembler initially chooses the contract type (delay payment contract vs on-time payment contract) and the buffer time, and two suppliers have to simultaneously determine their production lead times. We find that in equilibrium, both suppliers cut down their production lead times under the delay payment contract, and this makes them worse off than that under the on-time payment contract. Differently, the delay payment contract is the assembler’s dominant option. This is because by setting the buffer time, the assembler can significantly mitigate the possible delay risk caused by the suppliers’ decentralization under the delay payment contract. It also shows that the entire supply chain achieves the same service level under either the centralized condition or the decentralized condition, regardless of the applied payment contract type. Note that these results are robustness when we extend the model into the system containing N (N> 2) independent suppliers.