On Contractual Periods in Supplier Development

Abstract We consider supplier development within a supply chain consisting of a single manufacturer and a single supplier. Because supplier development usually requires relationship-specific investments, firms need to protect themselves against partner opportunism. Even though contracts are viewed as the primary formal means of safeguarding transactions, they also entail certain risks, e.g., a lack of flexibility, particular in a dynamic and uncertain business environment. Thus, we propose a receding horizon control scheme to mitigate possible contractual hazards while significantly increasing the overall supply chain profit. Our findings are illustrated by a numerical example.