The impact of hybrid push–pull contract in a decentralized assembly system

• The significant impact of hybrid contract in a decentralized assembly system.
• The firms׳ surpluses are highly influenced by the balance between suppliers׳ costs.
• The pull contract leads to the highest channel efficiency while there exists a cutoff between push and hybrid contracts.
• Carrying zero inventory risk does not necessarily raise the firm׳s profitability.

This paper investigates the pricing and production game in a decentralized assembly system that consists of one assembler and two independent suppliers. One supplier is able to exert the push contract on the assembler so as to transfer all his inventory risk, while the other supplier has to accept the pull contract from the assembler and consequently bears the overstock risk. Under this hybrid push–pull contract scheme, we show that the firms׳ equilibrium strategies lead to a two-layer decentralization occurring exclusively from the vertical relationships. The supplier׳s, the assembler׳s and the channel׳s profits are highly influenced by the balance between two suppliers׳ production costs. We also examine the impacts of three different contracts, push, pull and hybrid, on the firm׳s and the channel׳s performances. The pull contract always leads to the highest channel profit, while the hybrid contract dominates the push contract only if the supplier׳s cost under push contract is sufficiently high. From the firm׳s perspective, we show that a supplier may be worse off under push contract than that under pull contract, which implies that carrying zero inventory risk does not necessarily raise the firm׳s profitability.