Cooperation in Assembly Systems with Supply Risks

Interdependence among supply chain members increases their vulnerability to supply risks. This study explores the optimal decisions of supply chain members and their interactions within an unreliable assembly system facing supply risks. The assembler purchases complementary components from suppliers to assemble them into a final product, which requires exactly one unit of each component. First, we examine how the stochasticity and severity of supply risks influence the proactive and reactive decisions of assembly system members. We then analyze the interaction between upstream cooperation and supply risks. Our results show that the assembler's response varies depending on the severity of the observed supply risk, including maintaining the status quo, increasing the selling price, or increasing orders from the emergency source. Furthermore, potential supply risks can break down the one-to-one correspondence between complementary components. Our findings suggest that when potential supply risks are stochastically lower, suppliers lose their incentive to cooperate. The realized value of cooperation depends heavily on the observed supply risk and may even become negative if inappropriate wholesale prices are negotiated, making it a double-edged sword in the context of unreliable assembly systems. Therefore, upstream suppliers must carefully evaluate cooperation and price negotiations before committing to such agreements.