Manufacturer’s Optimal Auditing Policy of Supplier's Capacity

This research investigates a manufacturer’s optimal capacity auditing policy in the principal-agent context facing asymmetric information. Supply chain coordination through supplier capacity auditing has the ability to affect both supply chain efficiency and risk management challenges. So far not a lot of research on principal-agent relationships in the manufacturing context has been performed – specifically not on supplier capacity auditing with one party facing asymmetric information. The basic assumption of this model is the contracting relationship of one manufacturer and one supplier.

A price-quantity schedule is offered by manufacturer and the supplier selects one single-period fixed-price contract without any further communication and negotiation. The manufacturer’s decision according to the price-quantity schedules offered is upon order quantity, transfer payment and the audit application probability. The supplier’s production capacity is known to the supplier at all times but unknown to the manufacturer. In addition to that, the demand is stochastically distributed and concretizes after both parties agreed about the contract.

Basic profit functions of the manufacturer and the supplier are adjusted to match the requirements of the manufacturing context. In order to derive optimal closed form solutions, the equations are modified following an approach of Laffont and Martimort. An optimal capacity audit mechanism for a manufacturer who procures components from a supplier possessing private capacity information is pointed out.