Analysis of Supply Chain Contract Clauses on Supplier Flexibility

This article focuses on the systemic analysis of supply chain contract clauses on supplier flexibility and consequently puts forward a supplier selection approach for downstream buyer based on supplier flexibility from the perspective of risk sharing in supply chain. Firstly, it illustrates hierarchically supply chain contract clauses to orchestrate: (1) five specification parameters, which comprise supply price per unit (P), order cycle time (T), minimum delivery lead-time (L_min), minimum order quantity commitment (Q_min) and maximum order quantity limitation (Q_max), and (2) three penalty parameters, which consist of delivery lead-time violation penalty (alpha), order quantity reduction penalty (beta) and order quantity increasing penalty (gamma). And then, based on the flexible supply chain can be defined as an entity with little constraints of order quantity and delivery lead-time, it focuses on the quantitative analysis of measurement for supply chain flexibility (psi). The analysis reveals that (a) the supply chain flexibility consists of two parts that is lead-time flexibility and order quantity flexibility, (b) the value of the supply chain flexibility (psi) is close to 1, that means the upstream supplier flexibility is robust. Alternately, as the value of decreases nearly to zero, which means the upstream supplier flexibility is rigid, (c) from the perspective of risk sharing, psi equal to 1 means the upstream supplier bears on the whole risk while equal to 0 means the downstream buyer holds on the whole risk in supply chain. Further, it emphasizes that the supply chain contract, which comprises all parameters mentioned above, is a result of negotiation between the downstream and upstream parties to guarantee both coordination and a win-win outcome. It essentially reflects the extent of risk sharing of the both parties and flexibility of the upstream supplier. When many suppliers are available, the downstream buyer must select- the one with the greatest flexibility and the least overall cost. Finally, it depicts the least overall cost model, which comprises three parts: (1) component pricing, (2) order quantity violation penalty, and (3) delivery lead-time violation penalty.