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Risk ownership in contract manufacturing

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The authors consider a supply chain where a Contract Manufacturer (CM) serves a number of Original Equipment Manufacturers (OEMs). Decisions regarding productive resources are made before demand realization, hence the supply chain faces the risk of under-or over-investment. The CM and the OEMs differ in their forecast accuracy and in their resource pooling capabilities, leading to a disparity in their ability to minimize costs due to demand uncertainty. Two scenarios in which this risk is borne by the OEM and the CM, respectively, are considered. The authors investigate which party should bear the risk so that maximum supply chain profits are achieved. Furthermore, Ülkü, Toktay and Yücesan assess whether the parties benefit from operating under the scenario that maximizes the total supply chain profit. Finally, they examine the use of premiums to induce supply chain optimal behavior.

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