Production and delivery policies for enhanced supply chain partnerships

Recent research on supply chain management has highlighted the importance of building strong customer–supplier relationships in order to gain competitive advantage. This paper examines the benefits of buyer–supplier partnerships over lot-for-lot, i.e. single setup single delivery (SSSD) systems and suggests two policies that the supplier can pursue in order to meet customers’ needs: (1) Single setup multiple delivery (SSMD), and (2) Multiple setup multiple delivery (MSMD). If its fixed setup cost is relatively high, the supplier would prefer to implement SSMD and produce an entire order with one setup. However, if the supplier can reduce the setup cost and the supplier's capacity is greater than the threshold level (P?=?2D), it is more beneficial for the supplier to implement the multiple setups and multiple deliveries (MSMD) policy, even though he pays more frequent setup costs since the savings in inventory holding costs is greater than the increased setup costs. In the latter case, setup reduction is realized by the knowledge and efficiency gained through frequent setup operations. To provide guidelines for the policy selection, we examine the interactions among variables, such as production capacity, learning rate, and holding costs for both parties. The paper also discusses the benefit sharing plan, which discusses according to the contribution (or sacrifice) each party made to the partnership efforts.