Last Time Buys during Product Rollovers: Manufacturer & Supplier Equilibria

Abstract

Durable goods customers expect long-term availability of spare parts to maintain their product. This puts a strain on supply chains. Part suppliers want to obsolete older generations of parts with declining demand and reassign resources to new, growing generations. Meanwhile, durable goods manufacturers that purchase and sell spare parts to customers want suppliers to keep producing old parts. When suppliers offer a “last time buy” opportunity for legacy parts in anticipation of their retirement, manufacturers push back. We study the strategic interaction and equilibria of a supplier and a manufacturer during the rollover between a legacy part and its successor in a durable good supply chain. Evidence from our interviews shows that manufacturers attempt to use the future business of the new part to delay a supplier’s last time buy of the old part. However, this tactic is often ineffective in practice. We propose a two-stage noncooperative game that reproduces the behaviors observed in interviews. Our analysis of this game distills the conditions under which a manufacturer can leverage the future business to delay a last time buy. There exist only six strategies that achieve this delay. We present a necessary and sufficient condition for these six strategies to be subgame perfect Nash equilibria. The condition reduces to a closed-form threshold on the new part volume. We conclude with practical insights that can guide managers during a rollover discussion.