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Abstract
An increasing number of projects are adopting prefabrication to economize on time, labor, and materials in fixed-position layout operations, such as construction, ship building, and aircraft manufacturing. In such contexts, independent contractor and fabricator make interdependent decisions, which calls for prudent supply chain management because performance relies on coordination between their decisions. Many studies have developed integrated systems and propose various algorithms for scheduling efficiency and reliability. Nevertheless, they pay scant attention to conflicting interests amongst independent partners, which may result in subpar performance not only for the supplier but for the contractor as well. Coordination of conflicting interests has been extensively studied in economics and supply chain management; yet, those studies focus on order-quantity decisions under demand uncertainty for profit maximization, while managers in fixed-position operations are more concerned about delivery decisions under scheduling uncertainty for cost minimization. We consider the case of construction and explore a contractual scheme that aligns the agents’ decisions for coordination in a construction supply chain. Specifically, we propose a supplier rebate for coordination: the supplier grants a rebate if the contractor accepts the shipment in accordance with the delivery schedule that the contractor initially chose. We show that the optimal rebate fully coordinates the supply chain to minimize the joint supply chain costs. Thus, both the contractor and supplier benefit from the coordination by negotiating a mutually acceptable way to allocate the savings in joint costs between them. We further show that the rebate motivates the contractor to enhance its work scheduling.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Data availability statement
All data, models, and code generated or used during the study appear in the submitted article.
Notes
1 In a fixed-position layout, the project remains at one place while workers and equipment come to the site because the product is too fragile or too heavy to move throughout the production process. Examples are building a house, highway, bridge, ships, and aircrafts.
2 In a blanket agreement, the customer pre-plans the purchase of materials or services from the vendor at a predetermined price. When the purchase contract contains multiple delivery dates over a long period of time, the customer negotiates a price with the vendor and categorizes multiple invoices under a single blanket purchase order. It helps both companies efficiently manage order placement and fulfillment by simplifying logistics, planning, and administration (Noordewier Citation1989).
3 Mohamed (Citation2021) interviews module fabricators and frontline construction managers and shows that contractors’ frequent changes in delivery schedule prevail in prefab construction and the suppliers then seek compensation for resulting increase in inventory cost. The industry gradually recognizes demand for contractual alignments among the participants in a supply chain to secure collaboration and coordination.
4 If the supplier has greater power in the supply chain, it will transfer the costs resulting from supply chain inefficiencies to the buyer, which leads the buyer to make decisions for the benefit of the entire supply chain.
5 Unlike an allowance, which grants a discount upfront for the promise of accepting a responsibility, a rebate gives a discount once the buyer has complied with the responsibility (Blattberg and Neslin Citation1990, Chen et al. Citation2007).
6 These contracts induce the retailer to make decisions to maximize the joint supply chain profits, which is larger than the one in the case of the agents’ independent decisions. Thus, both supplier and retailer benefit from the contract by allocating the profit gain between them in a mutually acceptable way. Of course, the retailer can reject the contract, but will not do so because the firm earns greater profit with the contract.
7 The contractor may change the supplier in response to the supplier’s margin increase. Nonetheless, unlike the case of standardized bulk items such as screws, hinges, pipes, and electrical wiring components, it is very difficult to switch module fabricators in the context of prefab construction. Contractors incur a significant amount of switching cost, which includes expenses, time, and efforts to prospect a new supplier, re-evaluate the quality and reliability of its prefab module, and re-negotiate a mutually acceptable contract. This lengthy process potentially entails serious disruptions in the supply chain. Switching suppliers is even more complicated and time consuming if the fabricator outsources parts and components from other producers.
8 ξ(th − tl) − ξG(th) as shown in Appendix A.
9 Unit rebate gain and work-delay cost are δ*F(td*) and ηG(td*) as shown in Appendix B.
10 ξ(th − td*) − ξ[G(th) − G(td*)] as shown in Appendix B.
11 Joint costs in the conventional case − joint costs under the coordination = $564.11 − $397.39 = $166.72.
12 The reviewer brought this point to our attention.