How to facilitate supplier-supplier collaboration: The impact of a manufacturer’s order allocation policy and subsidy offering

Abstract

In response to rapidly changing market conditions, manufacturers are increasingly trying to induce collaborative interactions between suppliers to facilitate the sharing of problem-solving ideas, technical advice, and managerial know-how. However, even if supplier-supplier collaboration is an effective way to enhance operational performance, it could be challenging if the suppliers compete to win the same order from the manufacturer. By employing a game-theoretical model, this study explores how a manufacturer can leverage the order allocation policy to facilitate collaboration between two competing suppliers. The results show that the timing of the order allocation policy announcement is critical. If the policy is announced after observing the behavior of the suppliers, the manufacturer cannot induce the desired outcome. However, the announcement that precedes the behavior of the suppliers can lead to collaboration between suppliers if the associated cost is affordable. The maximum affordable level that reflects each supplier’s collaboration burden becomes mild when the suppliers possess a similar capability and secure a sufficient margin. Unlike the manufacturer, who always benefits from suppliers engaged in collaboration, collaborative suppliers require more restricted conditions to generate a higher profit. We also examine the effectiveness of an additional lever, the manufacturer’s financial support or subsidy for supplier-supplier collaboration. Our result indicates that if the subsidy is inappropriately determined, it could become a waste of resources.