UCL School of Management

Research seminar

Simple Contracts for Reliable Supply: Capacity Versus Yield Uncertainty


Woonam Hwang, London Business School


Wednesday, 17 December 2014
15:00 – 16:30
G21a Senate House, Malet Place, WC1E 7HU

Events such as labour strikes and natural disasters, and yield losses from manufacturing defects, have a substantial

impact on supply reliability. Importantly, suppliers can mitigate this supply risk by improving their

processes or overproducing, but their mitigating actions are often not directly contractible. We investigate

when and why the simple wholesale price contract performs well in such settings. We find that supply chain

profit (or equivalently, efficiency) is essentially determined by supply reliability, which in turn depends on

three factors: (i) the type of supply risk (whether the supplier’s capacity is random or the supplier’s yield is

random), (ii) the relative bargaining power of the buyer and the supplier, and (iii) whether the buyer or the

supplier determines the production quantity decision. We find that, although suboptimal, simple contracts

can often generate high efficiency. For random capacity, simple contracts perform well when the supplier is

powerful. Surprisingly, for random yield, when the buyer controls the production quantity decision, simple

contracts perform well when the buyer is powerful. If the buyer delegates the production decision to the

supplier, then simple contracts perform well when either party is powerful. Finally, we find that, for random

yield, simple contracts generally perform better under delegation than under control.

Open to
Executive Education: Project Management
Last updated Tuesday, 16 December 2014