Computers & Industrial Engineering 62 (2012) 504–526

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Computers & Industrial Engineering

journal homepage: www.elsevier.com/locate/caie

Vertical collaboration in the semiconductor industry: A decision framework

for supply chain relationships q
Bikram K. Bahinipati a,⇑, S.G. Deshmukh b
a
Quantitative Methods and Operations Management Group, Indian Institute of Management Kozhikode, Kozhikode, India
b
Department of Mechanical Engineering, Indian Institute of Technology Delhi, New Delhi 110 016, India

a r t i c l e i n f o a b s t r a c t

Article history: Vertical collaboration problem focuses on integrating and modeling the decision problems of the suppli-
Received 1 December 2010 ers and buyers together with the market intermediary by identifying the inefficiencies in the traditional
Received in revised form 2 August 2011 marketplace and aligning the incentives of members in the e-marketplace. The present work develops
Accepted 31 October 2011
and solves real life e-marketplace models for complex buyers–suppliers procurement problems by esti-
Available online 18 November 2011
mating the order quantities in the collaborated supply chain. The newsvendor framework considers
demand to be independent of the selling price as is generally the case in the semiconductor industry sup-
Keywords:
ply chain dealing with techno-savvy customers. The vertical collaboration process would be more effec-
Vertical collaboration
Buyer–supplier relationships
tive if the length of the planning horizon and order size is considered as a negotiation parameter between
e-Market the buyer and supplier. It is observed that the supplier’s expected profit function increases with the buy-
Collaboration scheme ers’ ordering quantity, which is important in characterizing the general structure of the collaboration
scheme of the supply chain.
Ó 2011 Elsevier Ltd. All rights reserved.

1. Introduction is the strategic benefits gained over competitors in the marketplace

Due to globalization and sustained demand growth, the semi-
conductor industries are focusing more to sustain their customer
base and to enhance revenue opportunities; so, they must manage
successive technological innovations effectively (Cao & Zhang,
2011; Fabbe-Costes, Roussat, & Colin, 2011). The most ideal ap-
proach is to introduce high margin innovative products at the right
time through optimal use of the resources and realignment of the
supply chain members to adjust to this trend (Ku, Gurumurthy, &
Kao, 2007). Due to rapid evolution and change of technology, the
future semiconductor manufacturers must work collaboratively
with its extended supply chain to bring about enhanced synchroni-
zation of procurement business functions (Wu, Erkoc, & Karabuk,
2005; Flynn, Huo, & Zhao, 2010).
The collaborative activities include information sharing, joint
relationship effort, and dedicated investments, which lead to
improved customer satisfaction and supply chain performance
(Nyaga, Whipple, & Lynch, 2010). The collaborative relationships,
based on trust and commitment with their supply chain partners,
are critical to achieve efficiencies, flexibility, and sustainable com-
petitive advantage (Chen, Yen, Rajkumar, & Tomochko, 2011; Cao &
Zhang, 2011; Panayides & Lun, 2009). This collaborative advantage
q operate under long-term agreements, such as supplier-owned
This manuscript was processed by Area Editor Mohamad Y. Jaber.
⇑ Corresponding author. Tel.: +91 9567880796.
E-mail address: bikram@iimk.ac.in (B.K. Bahinipati).
through partner enabled inventory centralization and ordering,
and supply chain partnering, which is the desired synergistic out-
come (Cao & Zhang, 2010).
The semiconductor industry sector is characterized by a num-
ber of key and unique characteristics from the perspective of prod-
uct features and the sector’s structure, where collaborative
practices are developed in response to the economic pressures
and customer requirement, driving the evolution of the chain
and encourage greater horizontal and vertical coordination (Kapur,
Peters, & Berman, 2003). With the objective of manufacturing and
supplying a specific product or component, or locating new
enterprises, all enterprises in the semiconductor manufacturing
cooperate as synergetic unit to pursue for success (Zhang, Xu, &
Wang, 2004).
The vertical collaboration problem in the semiconductor indus-
try forms the basis of multi-echelon inventory theory, since it con-
siders only two stock keeping locations, i.e., buyer and supplier.
Classical works in multi-echelon inventory theory assume that
these entities cooperate and hence solve their problems using a
centralized approach (Goyal, 1976). This theory suggests integrat-
ing and modeling the decision problems of the suppliers and
buyers together with the market intermediary. This is a valid
assumption if the SC entities belong to the same company or
inventory (SOI) systems (Centikaya & Lee, 2000, 2002). Supply
chain management (SCM) considers both logistics and information

0360-8352/$ - see front matter Ó 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.cie.2011.10.017
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
issues as well as dominance relationships between the entities. As
a result, SC studies focus on more than the system wide optimiza-
tion of inventory problems.
The typical activities which are critical to the management of
vertical collaborative relationships from a procurement perspec-
tive are: selecting suppliers, motivating, time of involvement,
assigning physical and human resources, information sharing, syn-
chronizing standards and coordination among supply chain mem-
bers. So, any member and any relationship within a supply
network are affected by the actions of other members, and thus
have to cope with these to enable successful collaborative relation-
ships (Grover & Saeed, 2007).
The emerging idea is that the greater the extent to which man-
ufacturers engage in e-market enabled transactions with upstream
and downstream members the better the performance (Rosen-
zweig, 2009). The research reveals that the collaborative e-market-
place is still a relatively new business model (Wu & Chuang, 2010).
It has potential for growth in optimizing supply chain networks,
enabling vertical collaboration between buyers, suppliers and lo-
gistic providers (Wang, Potter, Naim, & Beevor, 2011).
Current research in vertical collaboration in semiconductor
industry focuses on inventory management within the firm as well
as throughout the supply chain, to gain cost advantage. This collab-
orative procurement can be operationalized through the participa-
tion of all SC members in a private exchange (e-market) to gain
cost advantage and enhance responsiveness. So, it is imperative
to consider both e-market (centralized) models and traditional
market (decentralized) models for complex supply/replenishment
problems with the objective of obtaining collaborated decentral-
ized solutions for these problems. In order to maintain and im-
prove the competitive power of these industries, it is critical to
select agile, competent and compatible partners quickly and ratio-
nally during the formation phase of the collaborative relationship.
Further, an adaptable and reasonable modeling approach is neces-
sary to determine the nature of relationships between buyer and
supplier enterprise (Saen, 2007). This may be possible by develop-
ing an analytical framework to generate an evaluation system and
to provide the information regarding the nature or intensity of
buyer–supplier relationships. This approach would facilitate deci-
sion-making pertaining to vertical collaboration in the semicon-
ductor industry supply chain.
The general relationships between the members of fabless
semiconductor industry supply chain (subcontractors, and custom-
Fabrication Wafer
Die-bank
Fab Probe
1 1
Fab Probe
2 2
Fab Probe
3 3
Fab Probe
4 4
Fig. 1. Relationship between members in a semiconductor supply chain (pull system).
505
ers) are depicted in Fig. 1. As the customer demands are placed at
finished goods level, manufacturing requirements are communi-
cated to final test, assembly, wafer probe, and to the foundries. Effi-
cient means of communication are necessary to ensure the success
of the process, which can be achieved through the participation of
the supply chain partners in the e-marketplace.
2. Motivation and research objectives
The semiconductor industry is a rapidly changing industry with
shortening life cycles, fluctuating demand and continuous price
and cost pressures. In order to sustain the dynamic and competi-
tive environment, these enterprises must be flexible in the quan-
tity and type of product kept in inventory (Wu et al., 2005). The
business partners share resources to the relationship, establishing
mutual commitment, which reduces opportunistic ambitions and
promotes bilateral governance (Grover & Saeed, 2007). These
structures, implemented through collaborative initiatives, are stra-
tegic responses to uncertainty in supply and demand (Zacharia,
Nix, & Lusch, 2011).
The vertical collaboration considered from the procurement
perspective in the semiconductor industries may have market or
industry related constraints to survive in the market, such as re-
source availability with individual enterprises, and this might con-
tradict with profit maximization objectives. So, these industries
have to satisfy these constraints along with trust related condi-
tions, while working or under a collaborative framework (Panay-
ides & Lun, 2009).
The motivation to order more products/components in semi-
conductor industry, to achieve economies of scale, is restricted to
a single period in contrast to EOQ-oriented models with infinite
planning horizon. The semiconductor industries are characterized
by the fact that increasing the quality of products/components pro-
cured/manufactured does not result in fixed costs savings in future
periods. The existing literature on buyer–supplier coordination as-
sumes that the selling price of items at the buyer is a constant or is
a function of the order quantity. However, in the semiconductor
industry supply chain, with items/components of short product life
cycles, there is always a decline in the economic value of the item
over time, as is evident in PC manufacturing industry. These are
known as ‘permanent markdowns’ in marketing literature (Nair
& Closs, 2006).
AT OEM Customer /
Demand
AT Customer 1
1 OEM: Original
Equipment
Manufacturer
AT: Assembly/
Customer 2 Testing
AT
2 Fab:
Fabrication
Probe: Wafer
Probe
AT Customer 3
3
AT Customer 4
4
506 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
The researchers should not assume all partnering relationships
in vertical collaboration are strategic and ignore the operational as-
pects of partnering. So, the current research suggest a continuum
of strategic and operational partnering based on (1) orientation
of the partners (buyer and supplier), and (2) the degree of imple-
mentation of partnering between these two independent enter-
prises. Strategic partnering is a continuous and long-term inter-
enterprise relationship for achieving strategic goals, which delivers
value to the customers and profitability to partners. Operational
partnering is an as-needed and short-term relationship for obtain-
ing parity with competitors.
In view of the above, the present work focuses on developing
vertical collaboration models when customer demand is indepen-
dent of the selling price of the product, which is typical to the
semiconductor industry supply chain dealing with end customers
requiring continuous upgradation of technology to stay competi-
tive in the market, such as big corporate sectors. In this model, a
single-period stochastic buyer–supplier problem has been consid-
ered, where the buyers (PC manufacturers) successively decrease
their selling price during the planning horizon. It has been as-
sumed that this decrease in selling price is due to the permanent
markdowns. Further, it has been assumed that the end-customers
have different preferences in their willingness to pay. Some cus-
tomers prefer to buy products immediately after its launching in
the market even if it is costly; some customer prefer to buy it to-
wards the end of the planning horizon when it is cheaper. So, the
demand arrival rate (through point-of-sales data) has been mod-
eled as a pure Poisson process. This collaboration model has been
investigated as a profit maximization problem for this scenario in
semiconductor industry supply chain.
In keeping with the recent trends in supply chain practice, the
objectives of this work are as follows:
(a) Developing a modeling framework and theoretical under-
standing of vertical collaboration issues in the context of
new initiatives in the supply chain management.
(b) Exploring the conditions under which the vertical collabora-
tion works, and to render insights into contract design and
operational level decision making.
Based on the research objectives, the collaborating enterprises
must develop a viable strategy to determine the relationships to
coordinate inventory management decisions for cost advantage
and ensure the success of the vertical collaborative initiatives.
3. Literature review
Vertical collaboration in buyer–supplier network requires that
sensitive information and knowledge may be exchanged to other
parties including competitors through common suppliers (Barratt,
2004). So, the role of e-market is particularly important who act
as intermediaries to maintain the confidentiality of information
and knowledge shared by network members (Cheng, Chen, &
Mao, 2010).
In semiconductor industries, an enterprise’s ability to manage
resources and inventory is the most critical factor for its long-term
success (Cao, Vonderembse, Zhang, & Raghu-Nathan, 2010). These
enterprises must structure their supply chain to respond to de-
mand surge from new product introduction and market upside,
and to absorb short-term decline due to technological change
and market downside (Christopher, Mena, Khan, & Yurt, 2011).
The role of inventory and resource management is critical in these
industries, as the capital equipment cost is high (Bailey & Francis,
2008) and obsolescence rates are high (Gravier & Swartz, 2009).
So, these industries must consider ‘relational contracts’ between
a enterprises and outsourcing suppliers, where capacity invest-
ment must take place before the new product is fully defined (Tay-
lor & Plambeck, 2007).
In view of the above, the literature review on vertical collabora-
tion is presented from three perspectives: (a) supply chain rela-
tionships, (b) obsolescence costs, and (c) modeling approaches.
3.1. Perspective of supply chain relationships
The present work has defined vertical collaboration as a relation-
ship in which the buyer and the supplier work together for a com-
mon objective by sharing information and resources to solve
problems, improve products, and streamline inventory-related pro-
cesses. Such collaborative relationships are essential due to the fol-
lowing factors: (a) shorter product life cycles in semiconductor
industry supply chain have enhanced the speed of product innova-
tion (Cao & Zhang, 2011) (b) there is a trend toward mass customiza-
tion, which compelled the buyers and suppliers to jointly design,
develop and manufacture customized products associated with
high switching costs (Lee, Kim, Hong, & Lee, 2010), and (c) the
increasing need for resource specific investments requires increased
levels of information exchange and trust (Ha, Park, & Cho, 2011). As
the buyers have recognized their interdependence on the suppliers,
they work towards long-term contracts, consensus decision making
and joint problem solving approaches (Kim, Park, Ryoo, & Park,
2010). So, the buyers adopt a supplier policy, which compel the
suppliers to collaborate while protecting the status of each supplier
during the life of a given product (Constantino & Pellegrino, 2010).
While analyzing the vertical supply relationship, it has been
observed that the circulation of information and technology is a
crucial factor for supply chain efficiency (Esposito & Passaro,
2009). The collaborative activities, such as information sharing,
joint relationship effort, and dedicated investments lead to trust
and commitment, which in turn lead to improved satisfaction
and performance. The buyers focus more on relationship outcomes,
while suppliers look to safeguard their transaction specific invest-
ments through information sharing and joint relationship effort
(Nyaga et al., 2010).
Literature has focused on the perspective of transaction value
by contextualizing inter-firm collaboration in terms of relationship
learning and value co-creation viewed by both the buyers and
suppliers. It has been observed that the global environmental
and inter-organizational conditions influence learning capabilities,
which in turn influences relationship value for both supplying and
buying enterprises (Cheung, Myers, & Mentzer, 2010). There is a
positive effect of absorptive capacity, collaborative process compe-
tence and level of engagement on the operational and relational
success of a collaboration effort. The collaborative process compe-
tence mediates the relationship between absorptive capacity and
collaborative engagement, and positively influences both opera-
tional and relational outcomes (Zacharia et al., 2011).
The profitability benefits of supply chain relationships are cap-
tured predominantly by downstream chain members, whereas
cash cycle benefits are realized throughout the supply chain. The
chain members’ financial performance varies systematically with
measures of downstream bargaining power, downstream relation-
ship duration, and degree of supply consolidation (Lanier Jr., 2010).
It is supported by the fact that there is a positive relationship be-
tween partnership quality and supply chain performance, which
is strengthened in the presence of high demand- and supply-side
risks (Srinivasan, Mukherjee, & Gauret, 2011). The supply chain
relationship quality focuses on communication, cooperation, trust,
adaptation and atmosphere, and this has a significant positive im-
pact on cooperative strategies, such as relationship persistence,
relationship frequency, and relationship diversity (Su, Song, Li, &
Dang, 2008).
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
3.2. Perspective of obsolescence cost
High-volume and consumer oriented electronic products and
systems in semiconductor industries are always impacted by the
rapid rate of technology change; so, there is a need to stay on
the leading edge of technology in order to prevent loss of market
share to competitors (Singh & Sandborn, 2006). However, some
product sectors, such as communication systems lag behind the
leading edge because of high cost or long times associated with
new technology adoption (Gravier & Swartz, 2009; Dinesh Kumar
& Saranga, 2010). This phenomenon gives rise to product and com-
ponent obsolescence. So, this is a major challenge in the semicon-
ductor industries with volatile demand of customer market
segments. Obsolescence of products and components in the semi-
conductor industry increases the supply chain costs and decreases
the net profit of the collaborative supply chain. When obsolescence
costs are high (i.e., when the product has a low salvage value and a
high retail price as in semiconductor industries) and margins are
low due to short product life cycles, the profit of the buyer de-
creases in the collaborative supply chain environment (Xiao &
Jin, 2011).
While estimating the total relevant cost of the supply chain, the
obsolescence cost may be estimated based on the most likely dis-
position value of obsolete inventory (i.e. salvage value of the un-
sold components and products). The total relevant cost per year
increases with the percentage increase in obsolete demand. Fur-
ther, as the total relevant cost per year is directly proportional to
the percentage of postponement, it can be stated that the percent-
age of obsolescence depends primarily on the postponement deci-
sions (Lee, Billington, & Carter, 1993). If the obsolescence costs are
higher, better it is to postpone the final assembly in semiconductor
industry supply chain. This supports the argument that higher the
risks of product obsolescence, greater are the savings in postpone-
ment. The postponement strategy is being used in semiconductor
industries and consumer electronics industry, such as Dell, HP, Xi-
linx, and Motorola. Manufacturers are finding this strategy increas-
ingly attractive to provide better customer service at reduced cost.
By modularizing the design of power pack and postponing the
assembly of the power pack and manuals with the printer, HP
has reduced the investment in finished goods inventory (Lee
et al., 1993). Postponement is more valuable in a system that faces
returns and in which the salvage values are low, i.e., the return
costs high (Brown, Lee, & Petrakian, 2000).
Reduced supply bases, global sourcing, and reliance on supply
clusters increase a firm’s vulnerability to parts obsolescence as
the inevitable result of more interconnected and complex supply
chains – a disruption to one source of supply affects many buyers
(Craighead, Blackhurst, Rungtusanatham, & Handfield, 2007). The
most common response to diminishing supply sources in the pro-
duction and operations research has been to develop obsolescence
forecasting methods based on each part’s life cycle (Sandborn, Pra-
bhakar, & Ahmad, 2011). The results of technological forecasts are
to minimize the cost of mitigating obsolescence (Singh & Sandborn,
2006). In reality, the fabless semiconductor industry often collabo-
rates with the original equipment manufacturers to raise the sal-
vage value of the products and components by advertising. When
the manufacturer designs its product, it is better to consider the
salvage value of product. This is why the semiconductor industries
attempts to predict or even create a new trend through extensive
advertising campaigns.
3.3. Modeling approaches in literature
Non-collaborative modeling approaches in supply chain litera-
ture focuses either on buyer-driven or supplier-driven coordina-
tion. For the collaborative modeling approach, this attribute is
507
not applicable. The ‘classical buyer–supplier coordination problem’
in the literature, is the foundation of the collaboration models in
the present work. An important generalization of the classical
buyer–supplier problem in the semiconductor industry supply
chain is when the suppliers (chip manufacturers, electronics com-
ponent manufacturer and so on) are manufacturers and have finite
production rate. It has been concluded from the existing literature
on supply chain coordination that the type of dispatch policy used
to deliver buyer replenishments is particularly important in this
setting. This is due to the fact that the manufacturing at the sup-
plier enterprises may continue while the buyer enterprises are
being replenished. This may result in very complex inventory load
profiles for both the buyer and supplier enterprises depending on
the type of dispatch policy, which impacts the inventory holding
costs. The literature depicts various control policies, which are pre-
sented in Table 1.
Typically, in semiconductor industry supply chain, an original
equipment manufacturer (OEM) outsources some of its production
activities to a contract manufacturer, who in turn serves several
customers on the same capacitated production line. It has been
shown that an order release strategy with multiple decision levels
performs significantly better than an order release strategy with
only one decision level (Boulaksil & Fransoo, 2009). Inventory
models developed in the context of vertical collaboration typically
use newsvendor network settings with single-period and stochas-
tic demand. These models consider inventory investment by inde-
pendent decision makers in a stationary environment (McCarthy-
Byrne & Mentzer, 2011). So, the profit to the enterprises can be
modeled as a function of the inventory or resource level in the en-
tire supply network. In a newsboy setting, the buyers might benefit
from cooperation through coordinated ordering and inventory
pooling. The basic processes consist of placing coordinated orders
by the buyers and use these quantities to satisfy the total demand.
In this way, they can benefit from order coordination and perfect
allocation of the ordered quantity to the demands realized.
In the semiconductor industry supply chain, it is assumed that
the buyers are homogeneous, i.e., they have approximately the
same cost and revenue parameters. In this work, review has been
made of the deterministic fixed demand rate problem where the
demand rate is independent of the selling price at the buyer enter-
prises. The deterministic models help to gain insights into the
dynamics of the problem. Further, their solutions can be used as
approximations for stochastic demand problems. However, sto-
chastic problems provide better representations of real life applica-
tions in semiconductor industry supply chains. The literature on
the investigation of the stochastic nature of the problem is very
much limited.
The conventional belief has been that long-term buyer–supplier
relationships would increase the efficiency and service level in the
supply chain. However, the drawback of long-term relationships
might be lack of innovation and benchmarking with the most effi-
cient suppliers at the marketplace. So, the length of the relation-
ship or the planning horizon would be a critical indicator for the
success of the vertical collaboration procurement initiative. Fur-
ther, the review of literature indicates that trust, collaboration
and resource interdependency are important characteristics of
the e-market oriented governance structures. So, the SCM in an
e-market is an integrative approach for dealing with the planning
and control of materials, components and products moving from
suppliers to end customers (Croom, Romano, & Giannakis, 2000).
In summary, the supply chain models for collaborative inven-
tory management and vertical relationships, presented in the liter-
ature, has not paid due attention on the collaborative procurement
in the ‘e-market’ mode of operation. It is also imperative to explore
the structural and process integration mechanisms used by the
semiconductor industries to form a vertical mode of supply chain
508 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526

Table 1
Perspectives in SC literature supporting vertical collaborative relationships.

Authors Perspectives
Goyal (1976) Benefits of centralized modeling approach than decentralized modeling approach in terms of supply chain system costs
(referred as the ‘classical buyer–supplier problem’ in the literature)
Lal and Staelin (1984) Analyzed the buyer–supplier coordination problem with homogeneous buyers when the price schedule is continuous. This
problem can be treated as equivalent to a single buyer, single supplier problem. This may be due to the fact that the price
schedule that is optimal for one buyer applies to all other buyers
Monahan (1984) Discounts as a means for the suppliers to encourage the buyers to order more and to increase profits without changing the
buyers’ cost
Banerjee (1986) Lot-for-lot (LFL) dispatch policy
Banerjee and Burton (1994), Lu (1995) Identical delivery quantity policy (IDQ) dispatch policy
Goyal (1995) Deliver-what-is-produced (DWP) dispatch policy
Parlar and Weng (1997) Analyzed the coordination problem under a newsboy problem setting; analyzed both the centralized and decentralized
decision making models of the buyer and the supplier, and suggested conditions for which centralized modeling approach is
significantly better than the decentralized modeling approach. However, they did not provide any coordination mechanism
Silver et al. (1998) Centralized approach can be described as the basic deterministic model in multi-echelon inventory systems. The total
system cost per unit time in the centralized approach is represented as the summation of buyer’s total cost and the
supplier’s total cost per unit time
Anupindi and Bassok (1999) The suppliers may not always benefit from centralization, as it depends on the demand distribution, service levels, and the
level of market search. The suppliers might prefer competing buyers when the market search is high
Hill (1999) Proposed the globally optimal dispatch policy for the single buyer, single supplier manufacturing problem. But it has a very
complex structure that may be very difficult to implement
Barratt and Oliveira (2001) The establishment and maintenance supply chain relationships is a critical element for collaborative initiatives, which
includes mutuality of benefits, risks, and profit sharing
Jap (2001)), Cousins (2002)) The benefits of developing long-term relationships through collaboration can include decrease in transaction costs, and
increase in resource sharing, learning and risk sharing.
Ertek and Griffin (2002) Compared the buyer-oriented and supplier-oriented supply chains as a solution to the decentralized modeling approach,
where the impact of power structure is an interesting issue
Hartman and Dror (2003, 2005), Slikker Coordinated ordering and inventory pooling
et al. (2005))
Dong and Rudi (2004)), Zhang (2005)) The suppliers are not isolated from the effects of cooperation or competition at the buyers’ level in the supply chain
Handfield and Bechtel (2004) Interaction of elements, such as trust, power, and dependence play an influential role in enterprises’ decision to collaborate
Meca et al. (2004)), van den Heuvel et al. The buyers benefit from reduced ordering and inventory related costs due to coordinated ordering
(2007))
Bagchi, Ha, Skjoett-Larsen, and There is a significant correlation between the length of the relationship with suppliers and performance measures, such as
Soerensen (2005) total logistics cost, on-time delivery and rate of return. Supply chain managers should continuously benchmark their
suppliers with ‘‘best practice’’ in the supplier market
Matopoulos, Vlachopoulou, Manthou, Identify how trust, power and dependence interact with each other, and how they affect and determine the intensity of
and Manos (2007) collaboration, as well as, the selection of the appropriate information-data sharing technologies and techniques
Bahinipati, Kanda, and Deshmukh Detailed review of buyer–supplier coordination problems, which forms the basis for collaborative procurement
(2009a)

governance or relationship structure (McCarthy-Byrne & Mentzer,
2011). So, the future research must focus on developing analytical
modeling approaches for collaborative ordering and inventory
management in e-market operated supply chains. This approach
may be ideal for operational and tactical decision making to devel-
op strategic relationship among members of supply network.
4. Vertical collaboration in supply chains
The literature has identified two perspectives of buyer–supplier
relationships in supply chains: a purchasing and supply perspec-
tive, and a transportation and logistics perspective (Tan, 2001).
The objective of the first perspective is to reduce the supply base
and inventory, and to increase customer satisfaction. The objective
of the second perspective is to reduce transportation costs, reduce
demand uncertainty and provide supply chain visibility. In order to
achieve these goals, collaboration among SC members is critical
(Horvath, 2001; Skjoett-Larsen, Thernoe, & Andresen, 2003).
Classical works in multi-echelon inventory theory assume that
the buyer and the suppliers cooperate and hence solve their prob-
lems using a collaborative (centralized) approach. This is a valid
assumption if the supply chain members operate under long-term
agreements, such as supplier-owned inventory (SOI) systems. On
the other hand, supply chain management considers both logistical
and information issues as well as dominance relationships
between the members.
Although external pressure exerted by buyers on suppliers may
encourage the adoption of e-market, it may also result in distrust
that could reduce the effect of actual e-market use. The implemen-
tation of e-markets results in higher perception of risks due to
higher uncertainties, i.e., buyers face the risks of incomplete and
distorted information, whereas suppliers face the possibility that
their price offers will be reduced due to information transparency.
So, supplier distrust and perceived buyer opportunism may cause
supplier dissatisfaction and resistance to the adoption of such e-
markets. This underlines the importance of offering collaborative
procurement functions through e-markets, as this can result in a
win–win strategy by eliminating opportunism and price reduction.
The objective of the present work is to explore how firms can
collaborate in purchasing through e-market. Participating in an
e-market is known as ‘collaborative business’, irrespective of
whether the SC members pursue business through arms-length
business relationships or through long-term relationships (Barratt
& Rosdahl, 2002). So, e-markets for semiconductor industries are
collaborative initiatives. The researchers are focusing on e-market
supporting portfolios of sourcing strategies, including strategic
supply chain management. Rudberg, Klingenberg, and Kronhamn
(2002) discussed the possibility of supporting supply chain plan-
ning using e-markets. Grieger (2003) suggested that there are pos-
sibilities for managing multiple supply relationships through e-
markets. However, these collaborations have been limited to shar-
ing an e-market infrastructure, but not purchasing. So, the scope of
such collaborative initiatives should be extended to the investment
opportunities in SCM technology and IT infrastructure. Although
there have been a large number of literature from different quali-
tative perspectives of inter-organizational collaborative relation-
ships, quantitative perspectives of collaboration in the context of
e-market has not been studied systematically.
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
4.1. Classification of vertical collaboration procurement activities
The semiconductor industry supply chain classify vertical col-
laboration activities as collaborative fulfillment, pre-negotiated
purchasing contract execution, product life cycle management,
and supply chain coordination and integration, which can be de-
scribed as given below:
1. Collaborative fulfillment in semiconductor industry supply
chain represents the lowest level of collaboration after the busi-
ness partners negotiate a deal, which includes payment, deliv-
ery, order tracking, and after-sales maintenance. The e-
markets support negotiation of contracts and ensures fulfill-
ment of these activities. After the auction is over, both the par-
ties (buyer and supplier) continue to cooperate until the
products are delivered and payments are cleared. The e-mar-
kets may offer order tracking, requiring suppliers to cooperate
temporarily in order to share certain information with buyers.
2. Pre-negotiated suppliers in contract execution in e-market
helps in transferring transaction data between partners, such
as purchase orders, delivery notices and invoices. These e-mar-
kets (private exchanges) are only accessible by a specific buyer
and its recognized suppliers. Through these facilities, the busi-
ness partners can use the e-market infrastructure to manage
and automate their business processes, while eliminating open
market negotiation.
3. Product life cycle management focuses mostly on the develop-
ment stage of the product, which may include project manage-
ment, document management, and collaborative R&D activities.
The common characteristics of the semiconductor manufactur-
ing industries are the large number of parties involved in the
product development. The e-markets for these industries con-
nect suppliers at different echelons of the supply chain by pro-
viding business solutions including collaborative engineering,
document management, and computer aided design (CAD) con-
versions. In the semiconductor industry, numerous component,
subsystem and system designs must be generated by chip and
component manufacturers, and their suppliers when develop-
ing new products. These designs and related documentation
may be generated in different formats by different software
applications on different systems. So, the conversion and trans-
mission of this design information among the business partners
are important.
4. Supply chain coordination and integration deals with the trans-
portation and logistics aspects of the semiconductor industry
supply chain. The purpose of this activity is to eliminate ineffi-
ciencies in the supply chain. The most popular semiconductor
industry supply chain coordination functionality is supplier
owned inventory (SOI) and its variants. Collaborative planning,
forecasting and replenishment (CPFR) is an advanced SOI ser-
vice used in this industry, which is used to ensure enough quan-
tity to meet buyer demand, while minimizing inventory costs
(Holweg, Disney, Holstrom, & Smaros, 2005). In order to achieve
this goal, business partners agree to mutual business objectives
and measures, develop joint sales and operational plans, and
collaborate to generate and update sales forecasts and replen-
ishment plans.
Most of the semiconductor manufacturing industries use col-
laborative fulfillment, supply chain coordination and integration
activities. Collaborative procurements in e-markets try to build
connectivity between the business partners, which can support
pre-negotiated contract execution, supply chain coordination and
product life cycle management. Among all these activities, pre-
negotiated contract execution and supply chain coordination are
seen in e-markets.
509
4.2. Impact of e-marketplaces for vertical collaboration
In SCM, purchasing becomes strategic and tightly coupled
with other functions of supply chain, such as inventory manage-
ment and product development. Strategic SCM is supported by
information and communication technology (ICT) tools, such as
electronic data interchange (EDI), Internet, and e-market
(Garcia-Dastugue & Lambert, 2003; Lancioni, Smith, & Schau,
2003). Ovalle and Marquez (2003) explored the effectiveness
of various e-collaboration tools to share product information,
customer demand and transaction information. They concluded
that information sharing contributes to faster and more flexible
supply chain processes among SC partners, and make the pro-
cess more responsive to market changes. Some researchers think
that e-markets are only tools that support non-strategic pur-
chasing and short-term relationships (Choudhury & Hartzel,
1998). McLaren, Head, and Yuan (2002) developed a framework
for supply chain activities supported by e-business tools, in
which third party e-markets only support non-strategic product
procurement.
Various methods for synchronizing supply chain information
and processes between organizations are EDI/XML, joining an
e-marketplace, or utilizing shared collaborative SCM systems
(McLaren et al., 2002). There is a lack of suitable frameworks
in literature for analyzing the expected costs and benefits of
the supply chain members to determine which approach is most
suitable for an enterprise. In order to optimize the entire supply
network, the enterprises must jointly make supply and demand
decisions that create sustainable value for all members involved.
Collaborative SCM assists in (1) exchanging and integrating
information between suppliers and buyers, (2) tactical decision
making among the partners for collaborative planning, forecast-
ing, distribution and product design (Kumar, 2001), and (3) stra-
tegic joint decision making about partnerships and network
design. So, collaborative SCM systems allow enterprises to move
beyond mere operational level information exchange and opti-
mization, and can transform a business and its partners into
more competitive enterprises.
It is inferred from the review of literature that collaborative and
stable relationships have dominated market-oriented and
hierarchical governance structures in purchasing and supply chain
management. Further, if a majority of the purchasing is done
through existing collaborative partners, then that share of the mar-
ket must be discounted as potential transactional volume (Barratt
& Rosdahl, 2002). This may be one potential reason for the
e-markets focusing on collaborative functionality for procurement
in the semiconductor industry supply chain.
4.3. Framework for e-market supported vertical collaboration models
Supply chain collaboration in e-market is aimed at improving
the total expected system profits in a decentralized structure
and to bring them closer to those of a centralized structure (Tsay,
Nahmias, & Agrawal, 2000). There is scope for applications of
operations research (OR) models in internet-enabled supply
chains and e-markets (Sodhi, 2001). The basis for developing
frameworks for such models in neutral e-markets, buyer-oriented
e-markets and supplier-oriented e-markets is presented in this
sub-section.
Assume PC be the total expected system profits in the collabora-
tive structure (neutral e-market) and PD be the total expected sys-
tem profit in the non-collaborative structure (buyer-oriented/
supplier-oriented e-market). The optimal values of PC and PD can
be estimated by using the solutions to the following models in
the e-market:
510 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
M1 : Neutrale  market Model ðNEMÞ
Maximize expected value ½Buyer Profit þ Supplier Profit
Subject to
Buyer constraints
Supplier constraints
M2 : Buyer  orientede  market Model ðBEMÞ
Buyer’s ProblemðBP1Þ
Maximize expected value ½Buyer Profit
Subject to
Buyer constraints
Supplier’s Problem ðSP1Þ
Maximize expected value ½Supplier Profit
Subject to
Supplier constraints
M3 : Supplier  orientede  market Model ðSEMÞ
Supplier’s ProblemðSP2Þ
Maximize expected value ½Supplier Profit
Subject to
Supplier constraints
Buyer’s ProblemðBP2Þ
Maximize expected value ½Buyer Profit
Subject to
Buyer constraints
The objective function value of M1 gives the value of PC. Further, de-
fine P CB and PCS as the expected values of the buyer and the supplier
profits resulting from M1. So, PC ¼ PCB þ P CS .
In the buyer-oriented or supplier-oriented e-markets models,
the sub-problems can be solved sequentially. The buyer may solve
his sub-problem first, if he dominates the marketplace and vice
versa. In the e-marketplace with supplier competition, the buyer-
oriented model has greater dominance, and vice versa. The first
sub-problem (BP1) can be executed by the buyer and its solution
would determine the expected value of the buyer’s profits in
buyer-oriented e-marketplace (P DB ). Similarly, the objective func-
tion value of the second sub-problem (SP1) would determine the
supplier’s expected profits in the buyer-oriented e-marketplace
(PDS ). So, P D ¼ P DB þ P DS .
Since the neutral e-market model (NEM) attempts to maximize
the expected value of system profits, its objective function value
would provide an upper bound on the total expected profits of the
buyer–supplier system in the e-market. Hence, in the e-market-
place, PD < PC. So, the neutral e-market can be used as a benchmark,
and the gap between PD and PC can be considered as a potential or
motivation to improve the expected profits of the buyer and sup-
plier in the buyer-oriented and supplier-oriented e-markets. The
following observations can be made about buyer-oriented and
supplier-oriented e-markets from these market models:
4.3.1. Buyer-oriented e-markets
1. If PD < PC: The non-collaborative structure is no better than the
collaborative structure as far as system profits are concerned.
2. If P DB P PCB : The buyer’s expected profits in the non-collaborative
structure are at least the same as in collaborative structure, as
the buyer’s feasible solution for his decision variables attains
its maximum due to his dominance in the marketplace.
3. If P CS P P DS : The supplier’s expected profits in the collaborative
structure are at least the same as in the non-collaborative
structure.
4. PCS  PÞSD P PDB  P CB : The supplier’s gain from the collaborative
structure is at least the same as the buyer’s loss from the
ð1Þ non-collaborative solution, which is obvious from observations
(2) and (3) above.
4.3.2. Supplier-oriented e-markets
1. If PDS P PCS : The supplier’s expected profits in the non-collabora-
ð2Þ tive structure are at least the same as in collaborative structure,
as the supplier’s feasible solution for his decision variables
attains its maximum due to his dominance in the marketplace.
2. If PCB P PDB : The buyer’s expected profits in the collaborative
structure are at least the same as in the non-collaborative
structure.
3. PCB  PDB P P DS  P CS : The buyer’s gain from the collaborative
structure is at least the same as the supplier’s loss from the
non-collaborative solution, which is obvious from the observa-
tions (2) and (3) above.
These observations are crucial for supply chain collaboration in
ð3Þ e-marketplaces, because one enterprise’s gain from the collabora-
tive initiative is more than the other enterprise’s loss. In other
words, the supplier’s gain from using the collaborative initiative
can be used to compensate the buyer’s losses under such
initiative as well as to increase the supplier’s profits under the
non-collaborative scenario. This requires that the enterprises in
the non-collaborative mode of operation should be engaged in a
collaborative relationship in such a way that it would result in
the same outcome for the decision variables as in a collaborative
initiative. This would result in a mutual acceptable strategy for
fair and equitable sharing of the revenue. The revenue sharing
among the enterprises can be done by means of any supply chain
contract, such as fixed payments between the enterprises of the
supply chain, quantity discounts, rebates, return policies, or a
combination of all these. It can be negotiable between these
enterprises of the supply chain, or can be imposed by one
enterprise to control the behavior of the other enterprise
(Bahinipati, Kanda, & Deshmukh, 2009b). These strategies for
generating evenue/profits of the collaborative structure using
non-collaborative strategies in e-marketplaces are called collabo-
ration schemes.
5. Research methodology for e-market supported vertical
collaboration model
In this section, an attempt has been made to develop an analyt-
ical collaboration model when the demand for the product/compo-
nent is independent of the selling price of the product/component.
The problem has been approached by a newsboy setting due to the
following reasons:
(a) It is widely applicable for components with short product
life cycles, such as consumer electronics, software/hardware
products in semiconductor industry supply chain.
(b) The newsboy problem provides the solution for the last per-
iod of the corresponding multi-period stochastic problem.
The costs and related parameters used during the development
of analytical model for the vertical collaboration problem have
been defined and presented in Table 2.
5.1. Assumptions and characterization of marketplaces
The following assumptions have been made while analyzing the
problem on hand.
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
Table 2
Notations in the vertical collaboration model.
Notation Description
MU Monetary unit
TU Time unit
SKU Stock keeping unit
HB Inventory holding cost at the buyer (per unit per unit time)
(expressed in MU)
T Length of the planning horizon or cycle time of the component/
product (TU)
G Selling price of the component at T = 0 (to end customer)
(expressed in MU)
H Depreciation rate in the economical value of the component, such
that G  HT > 0
R(t) End customer price = G  HT (expressed in MU)
Ai Arrival time of the ith demand from the customer
X Number of demand arrivals during [0, T] = n
KB Fixed replenishment cost of the buyer (MU)
KS Fixed replenishment cost of the supplier (MU)
P Manufacturing cost of the component by the supplier (MU)
V Salvage cost or cost of obsolescence of the component (of the
unsold components at the end of the period) (MU)
B Penalty per unit due to lost sale (MU)
C Purchase cost per unit by the buyer from supplier (MU)
Q Ordering quality of the buyer (at the beginning of the planning
horizon) (SKU)
QC Optimal ordering quantity by the buyer in the collaborated
scenario (SKU)
QTM Optimal ordering quantity by the buyer in the traditional
marketplace (SKU)
QEM Optimal ordering quantity by the buyer in the electronic
marketplace (SKU)
PB(Q) Expected value of the buyer’s profit (as a function of the order
quantity) (MU)
PS(Q) Expected value of the supplier’s profit (as a function of the order
quantity) (MU)
PC(Q) Expected profit of the collaborated system between buyers and
supplier (MU)
E[R] Expected value of the revenue of the buyer (component wise)
(MU)
E[HC] Expected value of the holding cost of the buyer (MU)
E[SV] Expected salvage value or cost of obsolescence of the buyer (of the
components) (MU)
E[PC] Expected value of procurement cost of the buyer (MU)
E[RC] Expected value of the replenishment cost of the buyer (MU)
E[LS] Expected value of the lost sales at the buyer (MU)
1. A single short life-cycle product involving a single time-period
is considered for analysis.
2. There is no initial on-hand inventory.
3. The demand arrival during the planning horizon is a random
variable, which follows a certain probability distribution.
4. The replenishment costs of the buyers and suppliers, and the
holding cost of the buyers are fixed.
As outlined earlier, the major objective of the analytical model-
ing is to maximize the expected profit of the collaborated system.
While developing the analytical framework, perspectives of pro-
curement in semiconductor manufacturing industries may be con-
sidered. As such, in the semiconductor industries, the products/
components are often substitutable, i.e., the buyer’s demand may
be satisfied by another product. Typically, the buyers commit
themselves to a large extent in terms of the number of units to or-
der. So, the only decision to be made is about the value of Q, the
number of units to order, so that these can be placed into inventory
at the beginning of the period. The suppliers have one or more
opportunities for replenishment after the initial order is placed
by the buyer.
It may also be noted that the sales of the final products are usu-
ally influenced by promotional activities. This is done to reduce the
obsolescence cost in the supply chain, which is very common in
semiconductor industries. It is possible to dispose of any units of
511
Table 3
Characterization of marketplaces from the perspective of vertical collaboration.
Traditional marketplace [no collaboration (NC)]
 Buyer takes decision about the optimal ordering quantity, for which its
expected profit is maximum.
 Enterprise optimization focus or decentralized decision making
 No information sharing between supply chain members
 Less formal relationship with no or lower degree of commitment
 Authority lies with individual enterprises
 No resource, risk or profit sharing between buyer and supplier
Electronic marketplace [complete collaboration (CC)]
 Both buyer and supplier take decision (joint decision making) about the
optimal ordering quantity, for which the expected profit of the collabo-
rated system is maximum.
 Planning, division of roles and information and communication channels
are clearly defined.
 Supply chain optimization focus
 Complete information sharing to e-market intermediary (private
exchange)
 Joint authority structure and joint resource sharing
Hybrid marketplace [PARTIAL COLLABORATION (PC)]
 Buyer takes the decision about the optimal ordering quantity, for which
the expected profit of the decentralized supply chain system is
maximum.
 Information sharing as and when required
 Resource allocation, risk and profit sharing is done on mutual basis
 Authority lies with individual enterprises
the product remaining at the end of the planning horizon (by
receiving a salvage value for the units). So, the perspective of price
declines and product obsolescence in the semiconductor industry
can be considered as a parameter contributing to the buyer’s profit
model and can be estimated as the salvage cost of the unsold com-
ponents and products in a collaborative supply chain setting.
The research has also characterized the marketplace as tradi-
tional marketplace (TM), hybrid marketplace (HY) and e-market-
place (EM), for the development of market models and their
analysis. Traditional marketplace (TM) has been defined as a mar-
ket space in which buyers and suppliers are engaged in indepen-
dent decision making, and in which the optimal policy is
determined by their individual minimum expected cost; the nature
of buyer–supplier relationship in such a case has been defined as
‘‘no collaboration’’ (NC). Electronic marketplace (EM) has been de-
fined as a market space in which the e-market intermediary has an
access to the information of both buyers and suppliers and decides
the optimal policy based on the minimum joint total expected cost
of the centralized supply chain; the nature of buyer–supplier rela-
tionship in such a case has been defined as ‘‘complete collabora-
tion’’ (CC). Hybrid marketplace (HM) has been defined as a
market space in which the buyer is engaged in independent deci-
sion making with the help of an e-market and adopts a policy
based on the minimum joint total expected cost of the decentral-
ized supply chain; the nature of buyer–supplier relationship in
such a case has been defined as ‘‘partial collaboration’’ (PC). The
complete characterization of the three market spaces defined in
the present work has been depicted in Table 3.
Attempt has also been made to develop algorithms for tradi-
tional market model and e-market model. It has been operated
for several simulation runs to demonstrate decision policies for
vertical collaboration at the operational and tactical level. Further,
it has been attempted to compare the objective function values in
the traditional marketplace and e-marketplace models for given
sets of parameter values to establish the nature of relationships be-
tween the buyer and supplier [NC or PC or CC]. This model has
been extended through simulation to facilitate decision making.
The research framework for this model has been depicted in Fig. 2.
512 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526

5.2. Development of an analytical collaboration model
While analyzing this problem, certain other real-time consider-
ations from the perspective of semiconductor industries are made,
based on the feedback from the focus group supply managers.
These are as follows:
1. One component is required to produce one final product.
This is due to the fact that each final product requires one
critical component from its supplier before final assembly or
processing. The buyer may collaborate with the supplier for
the design, development and manufacturing of this critical
component.
2. The demand arrival process (from the end customer) is a pure
Poisson process (k = Arrival rate). This may be due to the fact
that the distribution of number of demand arrivals during a
specific time period is independent of the time and is indepen-
dent of the number of arrivals in earlier time intervals. So, the
number of demand arrivals in non-overlapping intervals is sta-
tistically independent, which is typical to a demand distribution
in the semiconductor industry supply chain dealing with short
life cycle products.
3. The price of the final product or component depends on the
time of the life cycle or planning horizon at which it is delivered
PB ðQ Þ ¼ E½Revenue þ Salvage cost  E½Holding cost
þ Shortage cost þ Purchase cost
þ Replenishment cost ð5Þ
The expected value of the supplier profit (for a given variable Q) de-
pends on the difference of manufacturing cost and selling price of
the components, as well as the fixed replenishment cost of the sup-
plier. The expected profit function of the supplier can be repre-
sented as
PS ðQ Þ ¼ ðC  PÞQ  K S ð6Þ
So, the collaboration model is developed with Q as the decision
variable.
The next step is to estimate the cost components of the buyer’s
expected profit in Equation (5). As the demand arrival is a random
process, the expected values of revenue, holding cost, obsolescence
cost or salvage cost and the cost of lost sales are to be estimated as
discrete cases.
(a) The expected value of the revenue generated by the buyer in
the discrete case is given by the following expression (Silver,
Pyke, & Peterson, 1998; Papoulis & Pillai, 2002).
X
1

or sold to the customer or buyer, i.e., End customer price, E½R ¼ E½RjX ¼ n:Prob:½X ¼ n ¼ E½RjX ¼ 0Prob:½X ¼ 0
n¼0
R(t) = G  HT (MU). This is due to the fact that the price of the
product or component decreases over time, which is typical to X
Q X
1
þ E½RjX ¼ nProb:½X ¼ n þ E½RjX ¼ nProb:½X ¼ n
the semiconductor industry supply chain.
n¼1 n¼Q þ1
4. The end customer demand is independent of the price of the
product or component. This is due the fact that the major buy- After analysis, simplification and rearrangement of the terms in the
ers or customers of the semiconductor industry supply chain above expression, the expected value of revenue generated by the
are very much technology dependent and they upgrade their buyer can be estimated. This has been presented in the following
technology continuously. As these buyers want to remain com- Expression (7).
petitive in the marketplace, they cannot wait for the price of the " #
XQ 
product or component to fall which is typical during its life HnT
E½R ¼ 0 þ Gn  Prob:½X ¼ n
cycle. So, the demand for the products or components is inde- n¼1
2
" #
pendent of the price. 1 
X HTQ ðQ þ 1Þ
5. It is important to note that most single-period stochastic þ GQ  Prob:½X ¼ n ð7Þ
n¼Q þ1
2ðn þ 1Þ
demand problems do not model inventory holding costs. This
is due to the inherent assumption that the period is so short (a) The expected value of inventory holding cost of the buyer in
that these costs can be ignored, or they charge the inventory the discrete case is represented in the following expression.
holding costs to the end-of-period items (i.e. obsolete or unsold X
1

items) by modifying the salvage value. In this sense, the analy- E½HC ¼ E½HCjX ¼ nProb:½X ¼ n ¼ E½HCjX ¼ 0Prob:½X ¼ 0
n¼0
sis in semiconductor industry is more realistic, because of the
consideration of an inventory holding cost for each time unit X
Q
þ E½HCjX ¼ nProb:½X ¼ n
that a component item stays in the inventory. n¼1
6. The semiconductor industries, characterized by volatile demand X1
of customer market segments and long times associated with þ E½HCjX ¼ n:Prob:½X ¼ n
new technology adoption, are associated with the risk of compo- n¼Qþ1

nent and product obsolescence. So, while estimating the profit

function of the supply chain, the obsolescence cost is estimated After analysis, simplification and rearrangement of the terms, the
based on the most likely disposition value of excess obsolete expected value of the inventory holding cost for the entire cycle
inventory (i.e. salvage value of the unsold components and length to be incurred by the buyer can be estimated. This has been
products). presented in the following Expression (8).
" #
XQ 
nTHB
The expected profit of the collaborated system can be esti- E½HC ¼ ðQHB TÞPr:½X ¼ 0 þ QTHB  Pr:½X ¼ n
n¼1
2
mated as the individual contribution of members to the supply " #
chain. X1
HB Q ðQ þ 1ÞT
þ Pr:½X ¼ n ð8Þ
n¼Qþ1
2ðn þ 1Þ
PC ðQ Þ ¼ PB ðQ Þ þ PS ðQ Þ ð4Þ
(c) The expected value of the obsolescence cost of unsold com-
The expected value of the buyer’s profit depends on revenue earned, ponents at the buyer is estimated based on the most likely
and other total relevant costs, such as inventory holding cost, obso- disposition value of the obsolete inventory or the salvage
lescence cost, shortage cost, procurement cost from supplier and value of the unsold components and products (at the end
fixed replenishment cost. The expected profit function of the buyer of the period). This expected cost of the buyer in the discrete
can be represented by case is given by the following expression:
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526 513

" #
X
1 X
Q The expressions for PB (Q) and PC (Q) depict the expected profit
E½SV ¼ E½SVjX ¼ nProb:½X ¼ n ¼ VðQ  nÞ Pr:½X ¼ n ð9Þ function of the buyer in the traditional market and the profit
n¼0 n¼0
function of the collaborative system in e-market respectively.
(d) The expected cost of lost sale or goodwill of the buyer in the These expressions must be solved simultaneously for establishing
discrete case is estimated as the penalty cost for the unsat- the ordering quantity for the traditional market and e-market,
isfied demands that arrive after the sale of Q units. The for a given ‘T’ value. The unique optimal ordering quantities
expected value of this cost is represented in the following QTM and QEM value necessitates the above profit functions to be
expression: " # concave.
X1 X
1
E½LS ¼ E½LSjX ¼ nProb:½X ¼ n ¼ Bðn  QÞ Pr:½X ¼ n ð10Þ
n¼0 n¼Q þ1 5.3. Test for concavity of the expected profit function PC (Q) for
collaborative relationships
(e) The expected value of the procurement cost and replenish-
ment costs are the fixed costs incurred by the buyer. These
It is imperative to establish unique optimum values of the
expected cost figures are represented in the following
ordering quantities (Q) of the buyer for both traditional market
expression:
and e-market, which makes PB(Q) and PC(Q) maximum, i.e., to
establish the concavity of the expected value of the profit
E½PC þ E½RC ¼ CQ þ K B ð11Þ
functions.
The expected value of the buyer’s profit can be estimated by
considering all the transaction cost components represented by Let DPC ðQ Þ ¼ PC ðQ þ 1Þ  PC ðQÞ
the expressions (7)–(11) and incorporating them in the buyer
D2 PC ðQ Þ ¼ DP C ðQ þ 1Þ  DPC ðQ Þ
profit function developed earlier in expression (5). After analysis,
simplification and rearrangement of the cost components, the
expected value of the buyer’s profit for the entire cycle length If D2PC(Q) < 0, then PC(Q) is a concave function of Q.
can be estimated. The expected value of the buyer profit function The final expression after simplification and rearrangement of
is depicted in the following expression: terms can be represented by Expression (14).
  " #
X1   
HnT HTQ ðQ þ 1Þ HTðQ þ 1Þ
P B ðQ Þ ¼ Gn  Pr:½X ¼ n þ GQ  Pr:½X ¼ n D2 PC ðQ Þ ¼ ðV  G  BÞ þ Pr:½X ¼ Q þ 1
2 n¼Q þ1
2ðn þ 1Þ ðQ þ 2Þ
" #  
XQ X1
HTðQ þ 1Þ HB TðQ þ 1Þ
þ VðQ  nÞ Pr:½X ¼ n þ ½VðQ  nÞPr:½X ¼ 0  þ Pr½X ¼ n ð14Þ
n¼1 n¼Q þ2
nþ1 nþ1
" #
X1 
nTHB
 ðQHB TÞPr:½X ¼ 0  QTHB  Pr:½X ¼ n
2 As the salvage cost is less than penalty cost due to loss sales and
" #n¼1
X1
HB Q ðQ þ 1ÞT goodwill, V < B ) V - B < 0. Further, G  HT P 0 ) G  HT QQ þ1
þ2
P
 Pr:½X ¼ n
2ðn þ 1Þ 0 ) G þ HT QQ þ1
þ2
6 0. So, the first expression in Equation (14) is
n¼Q þ1
" #
X1 negative, and hence D2PC(Q) < 0. This implies that the expected
 Bðn  Q Þ Pr:½X ¼ n  CQ  K B profit function of the collaborated system is a concave function.
n¼Q þ1 So, there is unique value of the decision variable Q, which makes
¼ CQ  K B þ QðV  HB TÞPr:½X ¼ 0 PC(Q) maximum, i.e., there is a unique QEM for e-market model.
XQ  
HnT HB nT Similarly, it can be proved that PB(Q) is concave and has a unique
þ Gn  þ VðQ  nÞ  QTHB þ Pr:½X ¼ n QTM for traditional market model.
n¼1
2 2
X1   Let QC = Value of the decision variable for maximum PC(Q). So,
HTQ ðQ þ 1Þ HB QðQ þ 1ÞT
þ GQ    Bðn  Q Þ Pr:½X ¼ n QC must satisfy the following inequalities:
n¼Q þ1
2ðn þ 1Þ 2ðn þ 1Þ
ð12Þ PC ðQ C þ 1Þ  PC ðQ C Þ < 0 ð15Þ
The expected profit of the collaborated system can be estimated by PC ðQ C  1Þ  PC ðQ C Þ < 0 ð16Þ
considering the individual profit contribution of members to the
supply chain (both buyer and supplier) depicted in expression (12) This system of inequality means that QC is the smallest value of Q
and expression (6) respectively. These profit functions are incorpo- which satisfies PC(Q + 1)  PC(Q) < 0 ) DPC(Q) < 0
rated in Expression (4) to compute the expected profit of the collab-
orated system. This has been presented in the following expression: But; DPC ðQ Þ ¼ P þ ðV  HB TÞPr:½X 6 Q 
P C ðQ Þ ¼ P B ðQ Þ þ P S ðQ Þ ¼ CQ  K B þ Q ðV  HB TÞPr:½X ¼ 0 X1  
ðH þ HB ÞTðQ þ 1Þ
X Q   þ G þ B Pr:½X ¼ n ð17Þ
HnT HB nT n¼Qþ1
nþ1
þ Gn  þ VðQ  nÞ  QTHB þ Pr:½X ¼ n
n¼1
2 2
X1  
HTQ ðQ þ 1Þ HB Q ðQ þ 1ÞT As the demand arrival process from the end customer is assumed to
þ GQ    Bðn  Q Þ Pr:½X ¼ n
n¼Q þ1
2ðn þ 1Þ 2ðn þ 1Þ follow a Poisson process, the probability of occurrence of n arrivals
þ ðC  PÞQ  K S ¼ PQ  ðK B þ K S Þ þ Q ðV  HB TÞPr:½X ¼ 0 in [0, T] is given by
XQ  
HnT HB nT
þ Gn  þ VðQ  nÞ  QTHB þ Pr:½X ¼ n
2 2 ekT ðkTÞn
n¼1
  Pr:½X ¼ n ¼ ð18Þ
X1
HTQ ðQ þ 1Þ HB Q ðQ þ 1ÞT n!
þ GQ    Bðn  Q Þ Pr:½X ¼ n
n¼Q þ1
2ðn þ 1Þ 2ðn þ 1Þ
So, the expression (17) can be simplified by incorporating the prob-
ð13Þ ability value presented in expression (18).
514 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
DPC ðQ Þ ¼ P þ ðV  HB TÞPr:½X 6 Q  þ ðG þ BÞf1  Pr:½X 6 Q g
X1
ekT ðkTÞn
 ðH þ HB ÞTðQ þ 1Þ
n¼Qþ1
ðn þ 1Þn!
¼ ðP þ G þ BÞ þ ðV  HB T  G  BÞPr:½X 6 Q 
ðH þ HB ÞðQ þ 1ÞT X1
ekT ðkTÞnþ1
 k
kT n¼Q þ1
ðn þ 1Þ!
¼ ðP þ G þ BÞ þ ðV  HB T  G  BÞPr:½X 6 Q 
ðH þ HB ÞðQ þ 1Þ X1
ekT ðkTÞn
 
k n!
n¼Q þ2
¼ ðP þ G þ BÞ þ ðV  HB T  G  BÞPr:½X 6 Q 
ðH þ HB ÞðQ þ 1Þ
 Pr:½X P Q þ 2
k
So, the expressions (15) can be represented by the following expres-
sion (19).
This implies that PC ðQ þ 1Þ  PC ðQ Þ
¼ ðP þ G þ BÞ þ ðV  HB T  G  BÞPr:½X 6 Q
ðH þ HB ÞðQ þ 1Þ
 Pr:½X P Q þ 2
k
With similar analysis, the expression (16) can be represented by the
following expression:
PC ðQ  1Þ  PC ðQ Þ ¼ ðP  G  BÞ  ðV  HB T  G  BÞPr:½X
ðH þ HB ÞQ
6 Q  1 þ Pr:½X P Q þ 1
k dealing with short life-cycle components and products. So, the next
The value the optimal ordering quantity for the collaborative model
can be determined by solving these relations for various T values to
establish optimal (Q, T) combination for supply chain relationships.
5.4. Comparison between traditional marketplace and e-marketplace
In a centralized supply chain (e-marketplace), information is
open to all echelons and information flow is smooth, and there is
a central planner who makes all the decisions. Hence, optimal
decisions which maximize the system-wide supply chain profit
can be made. On the other hand, in a decentralized supply chain
(traditional marketplace), the entities are separate, and often each
considers its own profit only. In order to improve the supply chain
efficiency, the supply chain entities can collaborate by setting an
appropriate contract. This contract which results in decisions by
individual parties that maximize the profit of the entire supply
chain and leaves each member of the chain satisfied is called a col-
laboration contract. This work has presented a two parameter rela-
tional contract in the form C(Q, T), where Q is the optimal ordering
quantity of the buyer to the supplier and T is the optimal length of
the planning horizon until which the buyer decides to be in the
market for traditional market, hybrid market and e-market. This
contract will help to determine the nature of relationships between
the members based on the transaction cost, i.e., based on the total
expected profit of the stakeholders or the entire SC. This contract
will ensure successful procurement and operational business
practices for long-term relationship in terms of resource sharing,
knowledge sharing, information sharing, and profit and risk
sharing.
In the collaborated e-marketplace, where there is complete col-
laboration between buyer and supplier, QEM is the smallest value of
Q that satisfies
ðP þ G þ BÞ þ ðV  HB T  G  BÞPr:½X
ðH þ HB ÞðQ þ 1Þ
6 Q  Pr:½X P Q þ 2 < 0
k ing (Bahinipati, 2009).
In the traditional marketplace, when there is no collaboration be-
tween buyer and supplier, QTM is the smallest value of Q that
satisfies
ðC þ G þ BÞ þ ðV  HB T  G  BÞPr:½X 6 Q
ðH þ HB ÞðQ þ 1Þ
 Pr:½X P Q þ 2 < 0 ð22Þ
LetgðQ Þ ¼ ðV  HB T  G  BÞPr:½X 6 Q
ðH þ HB ÞðQ þ 1Þ
Pr:½X P Q þ 2:
k
Then, from expression (19), QTM is the smallest value of Q for which
C + G + B + g(Q) < 0.
IfQ EM < Q TM ; then  C þ G þ B þ gðQ EM Þ P 0:
But; P 6 C: This implies that  P þ G þ B P C þ G þ B:
So;  P þ G þ B þ gðQ EM Þ P C þ G þ B þ gðQ EM Þ P 0:
This violates the expression (21). So, it is essentially inferred that
QEM P QTM, which encourages the buyer to order more in the collab-
orative environment than in the traditional procurement scenario.
ð19Þ
6. Development of algorithms for vertical collaboration
problem
The analytical model for the vertical collaboration problem is
the foundation for the developing insights in the real-time pro-
curement scenario in the semiconductor industry supply chain
ð20Þ
step is to develop algorithms for solving the traditional market
model and e-market models to generate the scheme for this collab-
orative initiative, and to gain research insights. The model has been
operated for several simulation runs to demonstrate decision pol-
icies for vertical collaboration at the operational and tactical level,
and to develop managerial implications for the semiconductor
industry supply chain planners. A flow chart depicting the appro-
priate marketplace dealing with various components/products
(Fig. 3) would offer structural and quantitative insight into the
interplay between vertical collaboration and joint replenishment
decision-making. The algorithm or the logical flow of simulation
for the traditional market model (no collaboration) and e-market
model (complete collaboration) is presented in the next section.
The vertical collaboration models for the buyer–supplier pro-
curement system [in traditional market (TM), hybrid market (HY),
and e-market (EM)] have only two controlling and variable param-
eters: (1) cycle time or planning horizon (T), and (2) ordering quan-
tity (Q). It has been shown that the optimal ordering quantity
depends on the cycle time. This situation has complicated the esti-
mation of expected profit of the SC system for short life cycle prod-
ucts. The expected profit for the SC system depends on these
parameters along with some other fixed parameters, such as HB,
G, H, V, C, KB, KS, P, B, and k. These parameters were initialized
and loaded to the simulator to get values of the variable parame-
ters for maximum expected profit of the SC. With the help of the
optimization tool, developed through a C program compiled by
using GNU compiler collection (GCC), this model has generated
the optimal ordering quantity (for e-market, traditional market
and hybrid market), and optimal planning horizon (T) for each
component/product. This will assist the SC planners to get a trigger
for the ordering quantity associated with each component/product,
and to decide the nature of the collaborative relationships for the
short life cycle products, whose cost changes with time. These
models, while operating in traditional and e-markets, would
facilitate individual enterprises to negotiate based on profit shar-
ð21Þ
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526 515

Fig. 2. Flow chart depicting the overall logic of the proposed vertical collaboration scheme.

6.1. Simulation results and discussion
A buyer–supplier procurement system in the traditional
marketplace, hybrid marketplace and e-marketplace (private
exchange) has been considered with various parameter values
(C, V, B, P, KB, KS, HB, G, H, k, and T). In the following, flows of
simulation in these marketplaces for decision making have been
presented.
(A) The logical flow of simulation for the TM scenario can be
outlined as follows:
 Step A.1: Determine the expected total profit function of the
buyer PB(Q) in terms of Q and T by using Expression (9).
 Step A.2: Solve the above expression to determine the optimum
QTM value for maximum PB(Q) value, where T = 1, 2, 3,. . .
 Step A.3: Estimate the PB(Q) value for optimal QTM at a particular
T value.
 Step A.4: Tabulate the results for each QTM and T combination.
 Step A.5: Determine the QTM and T combination at which PB(Q)
is maximum, which proposes the optimal contract C(Q, T) in the
traditional marketplace.
516 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526

Table 4
Diminishing growth rate of ordering quantity and concavity of profit.

T QTM QEM PTM(QTM) PEM(QEM) % Increase % Increase

in QTM in QEM
1 9 11 44.788 47.392
2 17 19 120.101 123.202 88.89 72.73
3 24 27 179.983 185.086 41.18 42.10
4 31 35 227.220 232.887 29.17 29.63
5 37 42 259.100 266.908 19.35 20.00
6 43 48 279.820 287.694 16.21 14.28
7 47 54 284.960 296.118 9.30 12.50
8 49 59 277.750 293.637 4.25 9.26
9 50 62 265.170 282.985 2.04 5.08
10 50 63 249.190 268.104 0 1.61

Input data set 1: C = 8, V = 3, B = 2, P = 5, KB = 18, KS = 20, HB = 0.4, G = 18, H = 1.5,

k = 8.

Further, each row in the Tables 5–7 compares the objective

Fig. 3. Flow chart for selection of most appropriate marketplace.
(B) The logical flow of simulation for the HY scenario can be out-
lined as follows:
 Step B.1: Repeat the Steps 1–4 as in TM scenario.
 Step B.2: Estimate the PS(Q) value for each QTM and T combina-
tion by using expression (3.3).
 Step B.3: Estimate the total profit PTM(QTM) = PB(QTM) + PS(QTM),
and tabulate the results for each QTM and T combination.
 Step B.4: Determine the optimal QTM and T combination at
which PTM(QTM) is maximum, which proposes the optimal con-
tract C(Q, T) in the HY scenario with parameters QHY and T.
(C) The logical flow of simulation for the EM scenario can be
outlined as follows:
 Step C.1: Determine the expected profit function of the collabo-
rated system PC(Q) in terms of Q and T by using Expression (10).
 Step C.2: Solve the above expression to determine the optimal
QEM for maximum PC(Q), where T = 1, 2, 3,. . .
 Step C.3: Estimate the PC(Q) value for optimal QEM at a particular
T value.
 Step C.4: Tabulate the results for each QEM and T combination.
 Step C.5: Determine the optimal QEM and T combination at
which PEM(QEM) is maximum, which proposes the optimal con-
tract C(Q,T) in the EM scenario with parameters QEM and T.
The preliminary simulation runs for different fixed parameter
values and order arrival rates (with the use of input data set 1) re-
sulted in the following inferences:
1. Irrespective of TM or EM, and cycle time and demand arrival
rate, the expected profit values show concavity (Table 4). The
expected profits in e-markets and traditional markets shows
concavity while plotted against cycle time for all values of
demand arrival rate.
2. Irrespective of the demand pattern and cycle time, the expected
profit margin for operating in e-markets is higher than that
operating in traditional markets. Further, the expected profit
margin in both the cases increase with higher demand arrival
rate (k).
3. For a given demand pattern, the ordering quantity increases
with cycle time and stabilizes at higher cycle time (Table 4).
functions values in the traditional marketplace, and e-marketplace
models for a given parameter values. Hence, it can be concluded
from the analysis of these simulation results that the cycle time, in-
stead of ordering quantity, is a critical parameter for negotiation
during vertical collaboration. Further, it can also be inferred that
the maximum expected profit of the SC is dependent on cycle time
provided that the ordering quantity is not highly constrained.
It can be noted that the expected profits of e-marketplace and
traditional marketplace models are dependent on T. Further, the
difference in the optimal system profits [PEM(QEM)–PTM(QTM)] in-
creases as T increases, for a given input data set. So, more efficient
collaboration mechanisms can be designed, where T can be consid-
ered as a negotiable parameter between the buyer and supplier.
This has been exhibited in the following three examples for effec-
tive managerial decision.
Considering a traditional market (TM) with both the ordering
quantity (Q) and the length of the planning horizon (T) as the nego-
tiable parameters, the buyer would want to order 43 SKU, and
would be in the market for T = 6 TU (refer Table 5). In this case,
the buyer would want maximize his own profits [PB
(QTM) = 170.82 MU]. However, the system profit would be maxi-
mized in hybrid market (HY) at T = 7 TU and QTM = 47 SKU, in
which case, the buyer would lose [170.82–163.96 = 6.86 MU], but
the system would gain [284.96–279.82 = 5.14 MU]. The cost sav-
ings from this solution (i.e., 5.14 MU) cannot be used to compen-
sate the buyer as well as to increase the expected profits of the
buyer and supplier. Further, the collaborated system (EM) profits
would be maximized at T = 7 TU and QEM = 54 SKU, in which case,
the buyer would lose 16.7 MU, but the system would gain 16.298
MU. The cost savings from this solution also cannot be used to
compensate the buyer as well as to increase the expected profits
of the buyer and the supplier. The managerial decision in such a
case is to opt for traditional marketplace (TM) and there is no col-
laboration (NC) between the buyer and supplier.
In the second case (Table 6) the buyer would want to order 32
SKU, and would be in the market for T = 6 TU. In this case the buyer
would want to maximize his own profits [PB (QTM) = 120.775 MU].
However, the system profit would be maximized in hybrid market
(HY) at T = 7 TU and QTM = 35 SKU, in which case, the buyer would
lose 4.584 MU, but the system would gain 4.416 MU. The cost sav-
ings from this solution (i.e., 4.416 MU) cannot be used to compen-
sate the buyer as well as to increase the expected profits of the
buyer and supplier. Further, the collaborated system (EM) profits
would be maximized at T = 7 TU and QEM = 40 SKU, in which case,
the buyer would lose 11.266 MU, but the system would gain
12.734 MU. The cost savings from this solution can be used to com-
pensate the buyer as well as to increase the expected profits of the
buyer and the supplier. The managerial decision in such a case is to
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526 517

Table 5
Profit comparison for optimal time period for input data set 1.

T QTM QEM PBTM PTM(QTM) PBEM PEM (QEM) PEM (QEM) – PTM(QTM)
1 9 11 37.788 44.788 34.392 47.392 2.604
2 17 19 89.101 120.101 86.202 123.202 3.101
3 24 27 127.983 179.983 124.086 185.086 5.103
4 31 35 154.22 227.22 147.89 232.887 5.667
5 37 42 168.10 259.10 160.91 266.908 7.808
6 43 48 170.82 279.820 163.69 287.694 7.874
7 47 54 163.96 284.96 154.12 296.118 11.158
8 49 59 150.75 277.75 136.64 293.637 15.887
9 50 62 135.17 265.17 116.99 282.985 17.815
10 50 63 119.19 249.19 99.10 268.104 18.914

Input data set 1: C = 8, V = 3, B = 2, P = 5, KB = 18, KS = 20, HB = 0.4, G = 18, H = 1.5, k = 8.

Table 6
Profit comparison for optimal time period for input data set 2.

T QTM QEM PBTM PTM(QTM) PBEM PEM (QEM) PEM (QEM) – PTM(QTM)
1 7 9 21.870 22.870 17.557 24.557 1.687
2 13 15 59.617 78.617 55.994 80.994 2.377
3 18 21 88.393 122.393 83.872 126.872 4.479
4 23 26 107.865 156.865 104.270 162.270 5.405
5 28 32 118.456 182.456 111.540 187.540 5.084
6 32 36 120.775 196.775 115.096 203.096 6.321
7 35 40 116.191 201.191 109.509 209.509 8.318
8 37 44 106.832 197.832 96.062 208.062 10.230
9 37 46 95.340 186.340 82.549 200.549 14.209
10 37 47 83.381 174.381 68.675 189.674 15.293

Input data set 2: C = 8, V = 3, B = 2, P = 5, KB = 18, KS = 20, HB = 0.4, G = 18, H = 1.5, k = 6.

Table 7
Profit comparison for optimal time period for input data set 3.

T QTM QEM PBTM PTM(QTM) PBEM PEM (QEM) PEM (QEM) – PTM(QTM)
1 12 15 46.232 69.232 38.007 73.007 3.775
2 22 25 100.825 163.825 94.232 169.232 5.407
3 31 35 133.827 232.827 126.084 241.084 8.257
4 40 45 144.977 279.977 133.944 288.944 8.967
5 48 54 135.059 302.059 122.233 313.233 11.174
6 55 62 105.668 300.668 91.868 314.868 14.200
7 61 69 59.886 278.886 44.121 295.121 16.235
8 63 75 3.675 230.675 18.438 256.561 25.886
9 63 79 56.108 170.892 87.173 203.826 32.934

Input data set 3: C = 10, V = 5, B = 6, P = 6, KB = 20, KS = 25, HB = 0.5, G = 20, H = 2, k = 10.

opt for electronic marketplace (EM) and there is complete collabo-
ration (CC) between the buyer and supplier.
In the third case (Table 7), the buyer would want to order 40
SKU, and would be in the market for T = 4 TU. In this case, the buyer
would want to maximize his own profits [PB (QTM) = 144.977 MU].
However, the system profit would be maximized in hybrid market
(HY) at T = 5 TU and QTM = 48 SKU, in which case, the buyer would
lose 9.911 MU, but the system would gain 22.082 MU. The cost
savings from this solution (i.e., 22.082 MU) can be used to compen-
sate the buyer as well as to increase the expected profits of the
buyer and supplier. Further, the collaborated system (EM) profits
would be maximized at T = 6 TU and QEM = 62 SKU, in which case,
the buyer would lose 53.109 MU, but the system would gain
34.891 MU. The cost savings from this solution cannot be used to
compensate the buyer as well as to increase the expected profits
of the buyer and the supplier. The managerial decision in such a
case is to opt for a hybrid marketplace (HY) and there is partial col-
laboration (PC) between the buyer and supplier.
The insight from the above analysis is that as ‘T’ increases, the
collaborative system profit increases. But the buyer loses more in
e-market than in traditional market. When the system cost advan-
tage (in terms of profit) by participating in an e-market can be used
to compensate for the buyer losses, the buyer would participate in
collaborative relationships (CC). When the system cost advantage
by participating in a hybrid market can be used to compensate
for the buyer losses, the buyer would participate in partial collab-
orative relationships (PC). Otherwise, the buyer and supplier would
be engaged in independent decision making leading to no collabo-
rative relationships (NC).
The analysis of the simulation results for the vertical collabora-
tion problem can also be depicted by various characteristic plots.
The relationship between the expected profit of the buyer (in
TM) and the expected profit of the supply chain systems (in both
HY and EM) with the planning (time) horizon and the optimal
ordering quantities have been depicted in the Figs. 4a–c and Figs.
5a–c respectively. Further, the relationship between optimal order-
ing quantity and the planning (time) horizon have been presented
in Fig. 6a–c for various scenarios. These profiles are indicators of
the performance of the supply chain under the characterization
of various collaborative schemes defined in the present study,
518 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
Fig. 4a. Relationship between planning horizon and expected profits (data set 1).
Fig. 4b. Relationship between planning horizon and expected profits (data set 2).
Fig. 4c. Relationship between planning horizon and expected profits (data set 3).
which leads to various managerial implications for the procure-
ment professionals of the semiconductor industry supply chain.
The profit functions are also solved for three sets of data, and in
each set, for different order arrival rates (k). The comprehensive
results with associated managerial decisions are depicted in
Tables 8–10. Further, some analysis has been made for data sets
3.1, 3.3, and 3.4 depicted in Table 10 regarding the optimal deci-
sion for collaboration. For data set 3.1, two managerial decisions
are feasible. For the complete collaboration (CC) case with optimal
T = 9, the buyers loss of 11.91 MU can be compensated from overall
system profit of 12.01 MU. So, the net system profit would be
(12.01–11.91 = 0.10 MU). For the partial collaboration (PC) case
with optimal T = 8, the buyers loss of 0.64 MU can be compensated
from overall system profit of 7.36 MU. So, the net system profit
would be (7.36–0.64 = 6.72 MU). So, the optimal managerial
decisions would be the selection of hybrid marketplaces (HY) with
partial collaboration (PC). Similar analysis can be made for the data
sets 3.3 and 3.4 in Table 9, and the optimal managerial decisions
Fig. 5a. Relationship between optimal ordering quantity and expected profits (data
set 1).
Fig. 5b. Relationship between optimal ordering quantity and expected profits (data
set 2).
Fig. 5c. Relationship between optimal ordering quantity and expected profits (data
set 3).
would be the selection of e-marketplaces (EM) with complete col-
laboration (CC) in both the cases.
In real-world semiconductor industries, shorter ‘T’ is preferred
by both buyer and supplier. This is due to the following. The prod-
uct is usually set at a fixed price (through price negotiations) well
before the R&D has been able to go through the process. So, with a
fixed price and shorter ‘T’, the individual gain of the buyer and sup-
plier may be high. This strategy may be suited for faster-to-market
of the product. However, due to short life cycle of the product in
this industry, the buyer would be interested to select the optimum
‘T’, as he is investing on the supplier to develop a strategic relation-
ship. The optimum ‘T’ is selected in such a manner that the systems
gain can be used to compensate for the loss of the buyer. An incen-
tive scheme would be in place for equitable sharing of excess sys-
tem gain between buyer and supplier, which is the most attractive
feature of this model. This may lead to a situation in which the
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526 519

competition in the marketplace, the present model can be suitably

modified to consider the aspect of securing sustainable stability.
This is beyond the scope of the present work.

6.1.1. Insights
The analytical framework proposes a number of insights, which
are as follows:

(a) It is observed from the literature that the supplier’s gain

from the e-market model solution is at least equal to the
buyer’s loss from the traditional market model solution. This
is the basis for vertical collaboration. This requires that the
solution of the traditional market model be coordinated in
Fig. 6a. Relationship between planning horizon and optimal ordering quantity
(data set 1).
such a manner that it results in the same outcome for the
decision variables, as does the solution of the e-market
model.
(b) Vertical collaboration problem focuses on improving the
total expected SC system profits in a traditional market
model and minimizes the gap with the e-market model.
 In the traditional market model, the sub-problems are
solved sequentially. Whether the buyer or the supplier
solves his sub-problem first depends on the party, which
dominates the systems.
 As the e-market model maximizes the expected system
profits, its objective function value is an upper bound
on the total expected profits of collaborated buyer–sup-
plier system.
(c) The e-market model can be used as a benchmark and the gap
between the profits in the traditional market model and e-
Fig. 6b. Relationship between planning horizon and optimal ordering quantity market model can considered as an inducement to improve
(data set 2). the solution of traditional market model.
(d) The e-market model can present a centralized approach to
maximize profits (collaboration scheme), and a mutually
agreeable way of sharing profits. The profit sharing can be
negotiable between the parties or forced by one SC member
to influence the behavior of the other member.

6.1.2. Managerial Implications

The analysis leads to a number of managerial insights, which
are as follows:

 The supplier’s expected profit function is increasing with the

Fig. 6c. Relationship between planning horizon and optimal ordering quantity
(data set 3).
OEM may revise the price of the product to increase the market
share.
In summary, the semiconductor industries has to set incentives
to create a situation, in which all the supply chain members has
self-interest to secure the sustainable stability of the entire net-
work. On one hand, these incentives must be of monetary nature
to create a short-term win–win situation (higher profits). On the
other hand, the incentives have to be of non-pecuniary nature to
create unique long-term relationship proposition, which cannot
be imitated easily by competitors (Gulati, Lawrence, & Puranam,
2005). This might result in higher profits or joint growth opportu-
nities in the future. The collaboration in supply chain network re-
lies on confidence and understanding. These characteristics have to
develop over time to achieve a superior joint solution of the prob-
lem. As the present work has not considered the perspective of
buyer’s ordering quantity Q. This is important in characterizing
the general structure of the mechanism for collaborated supply
chain.
 It is always advantageous for the supplier to receive larger order
from the buyer to achieve vertical collaboration. In fact, the
foundries/contract manufacturers are producing bigger wafers
to generate a large number of chips to minimize the system
cost, and to achieve vertical collaboration. This is due to the fact
that a discount scheme that offers a unit discount for order sizes
greater than or equal to QEM can be used by the contract manu-
facturers (suppliers) to influence the ordering behavior of the
buyers.
 The collaboration effort would be more effective, if the length of
the planning horizon or the time until a new product is
launched in the market (T) is considered as a variable to nego-
tiate a contract between buyer and supplier. This time is an
important component of the pricing strategy in semiconductor
industry supply chain.
 The present work has focused on demand which is independent
on the selling price. However, when the product attains matu-
rity in its lifecycle, the demand is dependent on the selling
price, which in turn depends on the time. So, time dependent
incentives may be offered by the supplier to change the order-
ing behavior of the buyer.
520 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526

Table 8
Managerial decision-making concerning collaboration for input data set 1.

SET 1 Optimal ‘Q’ (SKU) PB(Q) MU PSYS(Q) MU Optimal time Buyer’s loss System profit Managerial
period ‘T’ (TU) (DPB) MU (DPSYS) MU decision
1.1 Order arrival rate k = 6 SKU
TM 24 72.450 143.450 4 PC
HY 29 66.532 157.532 5 5.918 14.082 T=5
EM 38 38.159 165.159 6 34.291 21.709
1.2 Order arrival rate k = 8 SKU
TM 32 108.472 211.472 4 NC
HY 44 77.469 228.469 6 31.003 16.997 T=4
EM 50 64.817 239.817 6 43.655 28.345
1.3. Order arrival rate k = 10 SKU
TM 40 144.977 279.977 4 PC
HY 48 135.059 302.059 5 9.918 22.082 T=5
EM 62 91.868 314.868 6 53.109 34.891
1.4. Order arrival rate k = 12 SKU
TM 48 181.822 348.822 4 PC
HY 58 169.807 376.807 5 12.015 27.985 T=5
EM 74 119.199 390.199 6 62.623 41.377
1.5. Order arrival rate k = 15 SKU
TM 60 237.554 452.554 4 PC
HY 72 222.342 485.342 5 15.212 32.788 T=5
EM 92 160.362 503.362 6 77.192 50.808

Input data: C = 10, V = 5, B = 6, P = 6, KB = 20, KS = 25, HB = 0.5, G = 20, H = 2.

Table 9
Managerial decision-making concerning collaboration for input data set 2.

SET 2 Optimal ‘Q’ (SKU) PB(Q) MU PSYS(Q) MU Optimal time Buyer’s loss System profit Managerial
period ‘T’ (TU) (DPB) MU (DPSYS) MU decision
2.1. Order arrival rate k = 6 SKU
TM 32 120.775 196.775 6 CC
HY 35 116.191 201.191 7 4.584 4.416 T=7
EM 40 109.509 209.509 7 11.266 12.734
2.2. Order arrival rate k = 8 SKU
TM 43 170.82 279.82 6 NC
HY 47 163.96 284.96 7 6.86 5.14 T=6
EM 54 154.12 296.118 7 16.7 16.298
2.3. Order arrival rate k = 10 SKU
TM 54 221.111 363.111 6 NC
HY 60 211.801 371.801 7 9.31 8.69 T=6
EM 68 198.935 382.935 7 22.176 19.824
2.4. Order arrival rate k = 12 SKU
TM 65 271.546 446.546 6 NC
HY 72 259.718 455.716 7 11.828 9.17 T=6
EM 81 247.049 470.049 7 24.497 23.503
2.5. Order arrival rate k = 15 SKU
TM 82 347.244 573.244 6 CC
HY 82 347.244 573.244 6 0 0 T=6
EM 90 335.828 585.828 6 11.416 12.584

Input data: C = 8, V = 3, B = 2, P = 5, KB = 18, KS = 20, HB = 0.4, G = 18, H = 1.5.

6.2. Significance of cycle time (T)
In semiconductor industry, the buyer (OEM) is a product tech-
nology leader so that he does not carry an inventory of the compo-
nent at the end of each planning horizon or product life cycle since
the component is marginally improved after this time period.
Within each contract review period, the buyer makes replenish-
ment. At the beginning of the planning horizon, the buyer firm de-
cides to choose either long-term or short-term suppliers and keeps
the choice of suppliers intact until the end of planning horizon. The
use of these two extreme policies will help us obtain robust analyt-
ical results.
The buyer firm, facing dynamics and uncertainty in price and
demand for its major component, must make its purchasing plan.
The model is used to compare the effect of sourcing strategy alter-
natives for components on the total cost (purchasing, inventory,
shortage and obsolescence costs) incurred by the supply chain
members over the length of its entire planning horizon. Over the
planning horizon, the buyer firm could use either short- or long-
term suppliers. Long-term contracts cover at least 18–24 months
and include provisions for multiple shipments consistent with
the replenishment policies of the manufacturer. In contrast,
short-term contracts comprise much shorter periods (typically 3–
6 months), with provisions for multiple shipments during the con-
tract period. The choice of short-term suppliers and contract prices
are based on a periodic search process initiated by manufacturers.
In particular, it evaluates the cost and benefits of short term and
long term contracts for input components.
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526 521

Table 10
Managerial decision-making concerning collaboration for input data set 3.

SET 3 Optimal ‘Q’ (SKU) PB(Q) MU PSYS(Q) MU Optimal time Buyer’s loss System profit Managerial decision
period ‘T’ (TU) (-DPB) MU (DPSYS) MU
3.1. Order arrival rate k = 6 SKU
TM 38 170.40 231.40 7 CC (PC)
HY 42 169.76 238.76 8 0.64 7.36 T = 9 (8)
EM 50 158.41 243.41 9 11.91 12.01
3.2. Order arrival rate k = 8 SKU
TM 52 234.99 323.99 7 PC
HY 56 233.53 330.53 8 1.46 6.54 T=8
EM 66 219.97 336.97 9 15.02 12.98
3.3. Order arrival rate k = 10 SKU
TM 65 299.902 415.902 7 CC (PC)
HY 71 294.455 424.455 8 5.447 8.5533 T = 8 (8)
EM 77 291.605 430.605 8 8.297 14.703
3.4. Order arrival rate k = 12 SKU
TM 78 364.947 505.947 7 CC (PC)
HY 85 359.577 514.577 8 5.37 8.63 T = 8 (8)
EM 93 351.865 522.865 8 13.082 16.918
3.5. Order arrival rate k = 15 SKU
TM 87 451.549 610.549 6 NC
HY 97 434.315 613.315 7 17.234 2.766 T=6
EM 104 427.377 620.377 7 24.172 9.828

Input data: C = 6, V = 2, B = 1.5, P = 4, KB = 12, KS = 15, HB = 0.3, G = 16, H = 1.2.

6.2.1. Long-term suppliers 6.2.2. Short-term suppliers

Long-term relationships with a small number of suppliers
have a number of advantages. It can facilitate easier and more
frequent communication and information exchange, more effec-
tive monitoring of production processes, economies of scale in
production, elimination of expenses associated with frequent
rebidding for contracts, early supplier involvement (for faster
product development), and mutual cooperation (for order fulfill-
ment). Therefore, long-term contracts can lead to reduction in
purchase prices and improvement in delivery lead time perfor-
mance, over time, as a consequence of mutual efforts by the
buyer and the supplier.
The long-term contract covers the whole planning horizon of T,
including provisions for multiple shipments consistent with the
replenishment policies of the buyer firm. Once a long-term con-
tract is signed, the buyer could purchase as many components as
actual demand requires. When the market price goes down, the
buyer firm has the flexibility to purchase the minimum commit-
ment specified in the long-term contract and purchase the rest
from the market. This means that strategically, when the price is
predicted to vary significantly in the future, as is the case of a semi-
conductor manufacturing industry, choosing a long-term supplier
(extending over the entire product life cycle of approximately
18 months) could help the buyer firm to hedge against the risk of
incurring high purchasing costs.
Typically, long term contracts allow risk-averse decision mak-
ers to hedge against price uncertainty for components by specify-
ing a fixed price for the duration of the contract. In order to
motivate the long-term supplier to upgrade the component, when
signing a long-term contract, the buyer firm provides the supplier
a fixed relation-specific investment, as an incentive, for the entire
duration of the contract. This investment may include the effort
and cost of performing a detailed technical and financial audit
of the supplier, technical and financial support, investment in
equipment, and in some instances, acquisition of a share in the
supplier’s equity. Thus, signing a long-term contract for the sup-
ply of the component will guarantee stability and reliability in the
light of the fact that the component price can be quite dynamic
and erratic due to market competition and to volatility in supply
and demand.
Short planning horizons tend to favor short-term contracts and
discourage switching to long-term contracts. If sourcing planning
is done for short planning periods, it is less likely for the supply
managers to select long-term contracts. This is applicable to the
highly innovative components or products which have very small
product life cycles. During periods of rapid technological change
in semiconductor industries, reductions in length of planning hori-
zon can be viewed as the means to reduce long-term planning risk
associated with component and product obsolescence. So, empha-
sizing planning horizon or time period (T) perspective for collabo-
rative relationships may allow for a convergence of planning and
improvisation in new product development that would enable sup-
ply chain members to reduce the response time for new product
design to development to market introduction. This would directly
encourage the marketing personnel for close involvement with the
product or component developers and suppliers, and would accel-
erate time to market, which may be critical for achieving and
maintaining competitive advantage. The short-term contracts usu-
ally require enterprises to pay the market price for components.
Thus, they offer a speculative advantage as well as the flexibility
to switch to other suppliers.
Supply managers may act optimally by not investing in long
term contracts. This would be possible if the business environment
favors short-term contracts to dominate over long-term contracts.
In the present study on focus group of supply managers from eight
leading semiconductor manufacturing companies, it was indicated
that the average contract length was only 18 months, and even
these were reviewed frequently. Almost 25% of the contracts were
shorter than 6 months, and few were longer than 36 months. The
study also indicated that the process of vendor qualification is
tedious, long (up to 25 weeks) and expensive. The contract
negotiations can sometimes take up to 60 weeks. Thus, the cost
of entering into a long-term contract is perceived to be high.
Further, the supply managers often perceive a great degree of
uncertainty in component prices and technology changes (espe-
cially in semiconductor industries, where the product life cycle is
approximately 18 months). These conditions will tend to favor
short-term contracts in semiconductor industries dealing with
short life cycle products and components.
522 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
If the buyer firm decides to choose a short-term supplier over
the planning horizon, the buyer firm avoids being locked into a
long-term contract and is able to take the advantage of the best
price offered on the spot market in each time period. However,
to find the best price in each period, the buyer firm has to conduct
a market search to determine the likelihood of the best price on the
spot market that is independent of the demand distribution of the
component and to complete the supplier qualification process be-
fore a supplier is chosen. The prices of short-term suppliers are
random variables and depend on changes in demand and supply
in the market, supplier competition, and developments in the
product technology. The buyer firm purchases the exact amount
of realized demand from the short-term supplier after the demand
and the price are realized. Therefore, there must be a trade-off be-
tween long-term and short-term suppliers depending on the type
of product or component in semiconductor manufacturing
industry.
6.2.3. The short-term versus long-term supplier strategy
In the present analysis, T is the total number of time periods
(usually in quarters or three months) in the planning horizon with
‘t’ as the index for each period, T = 1, 2, ..., T. The planning horizon
for the problem is ‘T’ strategic review periods. Reasonable values
for ‘T’ are 18–24 months. Each strategic review period consists of
‘n’ tactical review periods (e.g., each tactical review period is
3 months long and there are 6 of them in a 18 months strategic re-
view period, ‘T’). It may be noted that one Time Unit is the tactical
review period of 3 months. Since all periods in the planning hori-
zon are independent from each other, this work calculated the
optimal ordering quantity (for both traditional market and e-mar-
ket) for each period independently considering the mean demand
arrival rate (k) with a various sets of fixed input data.
The purchasing system is sensitive towards T. This has been
clearly reflected in the simulation results. The objective is to find
the optimal (Q, T) combination at which profit functions are opti-
mal for a no-collaboration (NC), partial collaboration (PC) and com-
plete collaboration (CC) situations. These combinations can be
termed as ‘system optimal (Q, T) combination’ for a given set of in-
put data. So, the supply managers must critically consider the
selection and implementation of a particular ‘T’ value in the con-
tract. Often, T is extended beyond the life cycle of the product to
consider the future requirement during phase out period, before
complete withdrawal from the market. Further, the short life cycle
of semiconductor industry is always associated with supplier
competition. This may result in shorter ‘T’. However, to gain
competitive advantage, the competing suppliers must resort to
horizontal collaboration to counter the effect of volatile market
demand and obsolescence in the system. This collaborative
network of suppliers would result in an optimal selection of (Q,
T) combination at which the profit function of the supply chain sys-
tem would be optimum.
The present model quantifies the tradeoffs between short-term
supplier and long-term supplier. It is proved through analytical
and quantitative means that long-term contracts may not always
be optimal and developed conditions under which short-term con-
tracts will be preferred for cost advantage. The decision to enter
into long-term contracts is highly dependent on the nature of the
markets and the decision maker’s risk attitudes. When the market
conditions for components and products are evolving (non-station-
ary) over the length of the planning horizon, long-term contracts
may not be optimal right at the beginning of the planning horizon
even for risk-averse OEMs. It may be optimal to delay the decision
to switch to the long-term contract until more price realizations
have been observed. Thus, a combination strategy may be best sui-
ted for the short-lifecycle components and products in the semi-
conductor industry supply chain.
6.3. Significance of vertical collaboration
The analytical framework for vertical collaboration has certain
implications for the semiconductor industry, which are as follows:
1. This relationship is critical to determine the positioning of the
industry for long-term survival in terms of supplier involve-
ment for innovative product development and market share.
2. This collaborative approach establishes a perfect balance
between the industries’ technological development and strate-
gic orientation to facilitate acquisition of resources and core
competencies, and allocation and fulfillment of order among
compatible supply chain members.
3. The vertical relationship focuses on developing conducive orga-
nizational climate and managerial involvement apart from rou-
tine operational and financial involvement from all the
partnering organizations.
4. The vertical collaborative initiative requires strong internal
capabilities and strategic coherence with partner’s business
objectives and policies, for strategic outsourcing and long-term
survival.
5. As new technologies increase in complexity due to product
innovation, the enterprises must invest on suppliers and
acquire external capabilities to complement its internal core
competencies.
In order to maximize procurement business output through
investment on resource creation, collaborative initiatives be orga-
nized in such a manner that all the SC members should be both
responsible and autonomous. At the same time, the partners must
be united by a cohesive structure. The success of such a structure
requires that the managers be focused to partner firms’ financial
and resource involvement and their motivation to acquire desired
core competencies.
7. Perspectives and contributions
The major contribution of the present work is the characteriza-
tion and analysis of a critical aspect of the supply chain collaboration
based on the vertical relationships among stakeholders, which is
lacking in the existing literature. The present work has attempted
to redefine collaboration from the perspective of procurement prac-
tices in the semiconductor industry supply chain (Bahinipati, 2009).
Collaboration creates a synergistic business environment which
needs more than partnerships and aligned interests, and where
the enterprises leverage each other on an operational basis so
that the joint performance is better than the individual
performance.
Further, the proposed model contributes an analytical frame-
work and a decision support approach for procurement profession-
als and practitioners in the semiconductor industry supply chain.
This framework may be the starting point for tackling operational
and tactical issues to develop strategic relationships between
buyer(s)-supplier(s). In this regard, the most significant contribu-
tion of this work to the body of literature is that the collaborative
ordering motivates the buyers for larger orders from the suppliers
covering the entire life cycle of the product. Secondly, the vertical
collaborative relationship facilitates a contract in which the length
of the planning horizon is a negotiable parameter between buyer
and supplier for strategic cost and competitive advantage. Finally,
the analysis presents an alternate definition of the vertical collab-
orative relationships to the supply chain literature along with their
characteristics from the perspective of procurement in an e-market
mode of operation (Bahinipati, 2009).
 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
Vertical collaboration refers to a hybrid collaboration strategy
based on technology (e-market, and IT), time (cycle time, pull
process), resource productivity (inventory reduction, and facil-
ity, resource and equipment utilization) and relationships
(between buyers and suppliers) by sharing, interchanging and
investing in mutual plans, information and resources, and pro-
viding mutual visibility to change behavior, where the procure-
ment transactions can be automated through decision making
support of e-market intermediary by significantly improving
the profit value.
The characteristic features of the relationship based on vertical
collaborative initiatives can be summarized as follows, which
would provide suggestions and guidelines to the practitioners in
the semiconductor industry supply chain.
(a) The collaborative relationships are mutual agreements based
on trust, cooperation, and shared risks and investments.
(b) The e-market enhances transactions capability by identify-
ing and selecting new suppliers, establishing prices for prod-
ucts, components and materials, and aligning procurement
of materials/components from suppliers.
(c) The e-market enhances the collaborative capability by com-
municating delivery request to suppliers, communicating
manufacturing requirements to suppliers, and managing
and communicating engineering changes.
(d) Use of e-market, internet and other IT infrastructure based
systems enhance the speed of operation to compress the
cycle time.
(e) The enterprises increase customer satisfaction through bet-
ter visibility of the procurement process and reduction of
errors.
Fig. 7. Proposed relationship between members in a semiconductor supply chain (pull system). (see above-mentioned references for further information.)
523
(f) The partnering enterprises must have good cost information,
which is critical for selecting manufacturing locations as
well as developing plans for procurement.
(g) This relationship incorporates more than shared information
and a focus on SC cost, such as SC planning strategies and
schemes among partners.
(h) Better management control can be realized due to embed-
ded business schemes in the procurement system by
encouraging outsourcing and allow the enterprises to
engage in e-business to have more control of their opera-
tions by sharing customer-specific information.
(i) Cost saving can be realized through less costly and opti-
mized processes for procurement and lower cost indirect
goods by use of e-market.
In summary, the supply chain relationship diagram (Fig. 1) can
be suitably modified by incorporating the proposed vertical collab-
orative relationships, which is depicted in Fig. 7.
8. Concluding remarks
The present work aims at developing generic analytical model-
ing frameworks for vertical collaboration initiatives in the semi-
conductor industry supply chain dealing with short lifecycle
products where the demand is independent of the selling price.
The procurement process has been investigated by characterizing
the market space into three different types, such as traditional
marketplace, hybrid marketplace and e-marketplace. This process
has explored the conditions in which vertical collaboration works,
and has been extended through simulation to comprehensively as-
sess the nature of relationship with individual supply chain mem-
524 B.K. Bahinipati, S.G. Deshmukh / Computers & Industrial Engineering 62 (2012) 504–526
bers and to evaluate whether such an initiative is really feasible. It
has also investigated the perspectives of information sharing in
collaborative networks and its implementation in the semiconduc-
tor industry supply chain. The results of the work indicate that the
proposed approach results in fair and reasonable conclusions. The
outcome of this analysis is to provide an effective method for the
semiconductor industry supply chain members to evaluate the
success of such shared collaborative procurement systems in a
structured and simple manner. So, this research is significant be-
cause it provides a comprehensive vertical collaboration assess-
ment tool for operational and tactical decision making.
The contributions to the literature on supply chain collabora-
tion resulted from this study are: (1) Collaborative efforts among
chain members should be encouraged in order to improve opera-
tional and tactical performance. (2) As the SC members have varied
perception about high and low performing collaborative practices,
it may be recommended that the chain members should create a
negotiation mechanism that encourages the vertical collaborative
practices to achieve better performance.
The proposed method may be equally useful in analyzing and
assessing the success of any collaborative procurement in other
similar industries. The applicability of the proposed schemes for
the collaborative initiatives may be different for different indus-
tries. However, the proposed schemes may present general frame-
works for such initiatives in most industries dealing with short life
cycle products. So, the chain members need to modify and custom-
ize the approaches for collaborative practices that suit their unique
environment under which they operate.
As the expectation from the supply chain may be different for
different products and industries, which poses the major limitation
of the present work. Other limitations of this study are as follows:
(1) The study has not considered the competition from the similar
SC members from a global perspective, and (2) The study did not
consider the management structures of collaborative procurement
initiative from a global perspective. However, it seems that only
the threat of global competition can motivate the formation of
large-scale vertical collaboration initiative in industries. These lim-
itations lead to several directions for future research as depicted
below.
(a) From the perspective of vertical collaboration, this research
has drawn conclusion from dyadic relationships only, i.e.,
buyer–supplier. So, extending this research focus to more
complex supply chain relationships across the entire chain
would be useful. Further, some quantitative testing of the
model in similar industries is needed with the aim of theo-
retical replication.
(b) Customer order arrival rate plays an important role in the
vertically collaborated supply chain system. The present
work has assumed the order arrival as a Poisson process.
With the increase in the customer orders, in many situa-
tions, the classical Poisson process order arrival may not
be appropriate. In reality, the order arrival rate is typically
non-homogeneous, i.e., the arrival rate typically varies with
time. This occurs due to the customer market in which
demand is dependent on price. Analysis of such situations
in the semiconductor industry supply chain dealing with
short life cycle products would be an important area of
future research.
(c) In reality, most of the suppliers have the right to set their
own selling price, which can directly affect the market
demand. Thus, in a price-endogenous setting, the decision
which maximizes the expected profit should be determined
jointly with respect to the inventory level (ordering quan-
tity) and the selling price. Because of the complexity of the
decision based on both the price and ordering quantity, the
collaboration in the case of the price-endogenous scenario
has not been fully studied, which creates scope for further
research.
In summary, the present study has investigated the operational
and tactical decision policies for vertical collaboration problems in
semiconductor industry supply chain. These policies would offer
structural and quantitative insight into the interplay between ver-
tical collaboration and joint replenishment decision-making. These
policies may also offer insights into supplier selection problem for
such a collaborative initiative. In reality, a mixed-mode collabora-
tive relationship is highly desirable where the buyer collaborates
with a network of competing supplier for resource and capacity
sharing, which is the scope for future research.
Acknowledgment
The authors are grateful to the reviewers and the area editor for
their valuable comments and suggestions, which led to significant
improvement in the manuscript.
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