Manufacturer cooperation in supplier development under risk

Supplier development involves efforts undertaken by manufacturing firms to improve their suppliers’ capabilities and performance. These improvement efforts can be targeted at a variety of areas such as quality management, product development, and cost reduction. Since supplier development requires investments on the part of the manufacturer, it is important to optimally allocate investment dollars among multiple suppliers to minimize risk while maintaining an acceptable level of return. This paper presents a set of optimization models that address this issue. We consider two scenarios: single-manufacturer and multiple suppliers (SMMS) and two-manufacturer and multiple suppliers (TMMS). In the SMMS case, we suggest optimal investments in various suppliers by effectively considering risk and return. The TMMS case investigates whether manufacturers with differing capabilities could gain risk reduction benefits from cooperating with each other in supplier development. Through illustrative applications, we identify conditions in which both cooperation and non-cooperation are beneficial for manufacturers. Under conditions of cooperation, we propose optimal investments for manufacturers to achieve high levels of risk reduction benefits.