Coordination in decentralized assembly systems with uncertain component yields

Haresh Gurnani*, Yigal Gerchak

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

155 Scopus citations


The literature on assembly systems with random component yields has focused on centralized systems, where a single decision maker chooses all components' production quantities and incurs all the costs. We consider a decentralized setting where the component suppliers choose their production quantities based solely on their own cost/reward structure, and the assembly firm makes ordering decisions based on its own cost/reward structure. When the suppliers control their inputs but the outputs exhibit random yields, coordination in such systems becomes quite complex. In such situations, incentive alignment control mechanisms are needed so that the suppliers will choose production quantities as in the centralized system case. One such mechanism is to penalize the supplier with the worse delivery performance. We analyze the conditions under which system coordination is achieved while respecting participation constraints. Further, we determine the optimal component ordering policy for the assembly firm and derive the optimal coordinating penalties.

Original languageEnglish
Pages (from-to)1559-1576
Number of pages18
JournalEuropean Journal of Operational Research
Issue number3
StatePublished - 1 Feb 2007


FundersFunder number
Natural Sciences and Engineering Research Council of Canada


    • Game theory
    • Inventory
    • Supply chain coordination


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