New Directions in Supply Chain Management

Chapter 14

Pricing Supply Flexibility: The Impact of Variability and Information Asymmetry¹

Alexander O. Brown

Vanderbilt University

INTRODUCTION

A TRANSACTION BETWEEN A SUPPLIER and a manufacturer often proceeds as follows. Based on his forecast of future demand, a manufacturer places an order for components with the supplier with a production/delivery lead time before the order is needed. After receiving the order, the supplier produces it and delivers it to the manufacturer. Of course, since the manufacturer’s order is based on an uncertain forecast, he will generally have either too much or too little supply once the order arrives. Since the supplier does not produce the components until the order is placed by the manufacturer, the manufacturer ...