Operations, Information and Decisions Papers

Document Type

Journal Article

Date of this Version

12-2003

Publication Source

Management Sciecne

Volume

49

Issue

12

Start Page

1653

Last Page

1670

DOI

10.1287/mnsc.49.12.1653.25115

Abstract

We consider the order-fulfillment process of a supplier producing a customized capital good, such as production equipment, commercial aircraft, medical devices, or defense systems. As is common in these industries, prior to receiving a firm purchase order from the customer, the supplier receives a series of shared forecasts, which are called “soft orders.” Facing a stochastic internal manufacturing lead time, the supplier must decide at what time to begin the fulfillment of the order. This decision requires a trade-off between starting too early, leading to potential holding or cancellation costs, and starting too late, leading to potential delay costs. We collect detailed data of shared forecasts, actual purchase orders, production lead times, and delivery dates for a supplier-buyer dyad in the semiconductor equipment supply chain. Under the assumption that the supplier acts rationally, optimally balancing the cancellation, holding, and delay costs, we are able to estimate the corresponding imputed cost parameters based on the observed data. Our estimation results reveal that the supplier perceives the cost of cancellation to be about two times higher and the holding costs to be about three times higher than the delay cost. In other words, the supplier is very conservative when commencing the order fulfillment, which undermines the effectiveness of the overall forecast-sharing mechanism.

Keywords

imputed cost, Supply Chain Management, semiconductor equipment

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Date Posted: 27 November 2017