[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v52y2006i6p881-896.html
   My bibliography  Save this article

Procuring Fast Delivery: Sole Sourcing with Information Asymmetry

Author

Listed:
  • Gérard P. Cachon

    (Operations and Information Management, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Fuqiang Zhang

    (Paul Merage School of Business, University of California, Irvine, California 92697-3125)

Abstract
This paper studies a queuing model in which a buyer sources a good or service from a single supplier chosen from a pool of suppliers. The buyer seeks to minimize the sum of her procurement and operating costs, the latter of which depends on the supplier's lead time. The selected supplier can regulate his lead time, but faster lead times are costly. Although the buyer selects the supplier to source from (possibly via an auction) and dictates the contractual terms, the buyer's bargaining power is limited by asymmetric information: The buyer only has an estimate of the suppliers' costs, while the suppliers know their costs precisely. We identify a procurement mechanism that minimizes the buyer's total cost (procurement plus operating). This mechanism is not simple: It is a numerically derived nonlinear menu of contracts. Therefore, we study several simpler mechanisms: e.g., one that charges a late fee and one that specifies a fixed lead-time requirement (no menus, no nonlinear functions). We find that simple mechanisms are nearly optimal (generally within 1% of optimal) because asymmetric information conveys significant protection to the supplier, i.e., the supplier is able to retain most of the benefit of having a lower cost. Renegotiation is another concern with the optimal mechanism: Because it does not minimize the supply chain's cost, the firms can be both better off if they throw away the contract and start over. Interestingly, we find that the potential gain from renegotiation is relatively small with either the optimal or our simple mechanisms. We conclude that our simple mechanisms are quite attractive along all relevant dimensions: buyer's performance, supply chain performance, simplicity, and robustness to renegotiation.

Suggested Citation

  • Gérard P. Cachon & Fuqiang Zhang, 2006. "Procuring Fast Delivery: Sole Sourcing with Information Asymmetry," Management Science, INFORMS, vol. 52(6), pages 881-896, June.
    • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:6:p:881-896
    DOI: 10.1287/mnsc.1060.0510
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1060.0510
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.1060.0510?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Charles J. Corbett, 2001. "Stochastic Inventory Systems in a Supply Chain with Asymmetric Information: Cycle Stocks, Safety Stocks, and Consignment Stock," Operations Research, INFORMS, vol. 49(4), pages 487-500, August.
    3. Yeon-Koo Che, 1993. "Design Competition through Multidimensional Auctions," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 668-680, Winter.
    4. Chung-Lun Li & Panos Kouvelis, 1999. "Flexible and Risk-Sharing Supply Contracts Under Price Uncertainty," Management Science, INFORMS, vol. 45(10), pages 1378-1398, October.
    5. Ranga V. Ramasesh & J. Keith Ord & Jack C. Hayya & Andrew Pan, 1991. "Sole Versus Dual Sourcing in Stochastic Lead-Time (s, Q) Inventory Models," Management Science, INFORMS, vol. 37(4), pages 428-443, April.
    6. John Asker & Estelle Cantillon, 2008. "Properties of scoring auctions," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 69-85, March.
    7. Albert Y. Ha & Lode Li & Shu-Ming Ng, 2003. "Price and Delivery Logistics Competition in a Supply Chain," Management Science, INFORMS, vol. 49(9), pages 1139-1153, September.
    8. Lode Li, 1992. "The Role of Inventory in Delivery-Time Competition," Management Science, INFORMS, vol. 38(2), pages 182-197, February.
    9. Erica L. Plambeck & Stefanos A. Zenios, 2000. "Performance-Based Incentives in a Dynamic Principal-Agent Model," Manufacturing & Service Operations Management, INFORMS, vol. 2(3), pages 240-263, April.
    10. Ravi Anupindi & Ram Akella, 1993. "Diversification Under Supply Uncertainty," Management Science, INFORMS, vol. 39(8), pages 944-963, August.
    11. Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2000. "Information, Contracting, and Quality Costs," Management Science, INFORMS, vol. 46(6), pages 776-789, June.
    12. Ehud Kalai & Morton I. Kamien & Michael Rubinovitch, 1992. "Optimal Service Speeds in a Competitive Environment," Management Science, INFORMS, vol. 38(8), pages 1154-1163, August.
    13. Wei Shi Lim, 2001. "Producer-Supplier Contracts with Incomplete Information," Management Science, INFORMS, vol. 47(5), pages 709-715, May.
    14. Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-286, July.
    15. Edieal J. Pinker & Abraham Seidmann & Yaniv Vakrat, 2003. "Managing Online Auctions: Current Business and Research Issues," Management Science, INFORMS, vol. 49(11), pages 1457-1484, November.
    16. Stephen M. Gilbert & Z. Kevin Weng, 1998. "Incentive Effects Favor Nonconsolidating Queues in a Service System: The Principal--Agent Perspective," Management Science, INFORMS, vol. 44(12-Part-1), pages 1662-1669, December.
    17. Gérard P. Cachon & Martin A. Lariviere, 2001. "Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain," Management Science, INFORMS, vol. 47(5), pages 629-646, May.
    18. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    19. Kut C. So, 2000. "Price and Time Competition for Service Delivery," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 392-409, April.
    20. Charles J. Corbett & Deming Zhou & Christopher S. Tang, 2004. "Designing Supply Contracts: Contract Type and Information Asymmetry," Management Science, INFORMS, vol. 50(4), pages 550-559, April.
    21. Robert G. Hansen, 1988. "Auctions with Endogenous Quantity," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 44-58, Spring.
    22. Manelli, Alejandro M & Vincent, Daniel R, 1995. "Optimal Procurement Mechanisms," Econometrica, Econometric Society, vol. 63(3), pages 591-620, May.
    23. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
    24. René Caldentey & Lawrence M. Wein, 2003. "Analysis of a Decentralized Production-Inventory System," Manufacturing & Service Operations Management, INFORMS, vol. 5(1), pages 1-17, November.
    25. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
    26. Sedarage, Dayani & Fujiwara, Okitsugu & Trung Luong, Huynh, 1999. "Determining optimal order splitting and reorder level for N-supplier inventory systems," European Journal of Operational Research, Elsevier, vol. 116(2), pages 389-404, July.
    27. Plambeck, Erica L. & Taylor, Terry A., 2004. "Implications of Breach Remedy and Renegotiation for Design of Supply Contracts," Research Papers 1888, Stanford University, Graduate School of Business.
    28. Damian R. Beil & Lawrence M. Wein, 2003. "An Inverse-Optimization-Based Auction Mechanism to Support a Multiattribute RFQ Process," Management Science, INFORMS, vol. 49(11), pages 1529-1545, November.
    29. Charles J. Corbett & Xavier de Groote, 2000. "A Supplier's Optimal Quantity Discount Policy Under Asymmetric Information," Management Science, INFORMS, vol. 46(3), pages 444-450, March.
    30. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    31. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-86, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gérard P. Cachon & Fuqiang Zhang, 2007. "Obtaining Fast Service in a Queueing System via Performance-Based Allocation of Demand," Management Science, INFORMS, vol. 53(3), pages 408-420, March.
    2. Fuqiang Zhang, 2010. "Procurement Mechanism Design in a Two-Echelon Inventory System with Price-Sensitive Demand," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 608-626, August.
    3. Zhibin (Ben) Yang & Göker Ayd{i}n & Volodymyr Babich & Damian R. Beil, 2009. "Supply Disruptions, Asymmetric Information, and a Backup Production Option," Management Science, INFORMS, vol. 55(2), pages 192-209, February.
    4. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, vol. 53(2), pages 241-259, February.
    5. Mustafa Akan & Bar{i}c{s} Ata & Martin A. Lariviere, 2011. "Asymmetric Information and Economies of Scale in Service Contracting," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 58-72, September.
    6. Pooya Farahvash & Tayfur Altiok, 2011. "A multi-period inventory model with multi-dimensional procurement bidding," Annals of Operations Research, Springer, vol. 186(1), pages 101-118, June.
    7. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    8. İsmail Bakal & Nesim Erkip & Refik Güllü, 2011. "Value of supplier’s capacity information in a two-echelon supply chain," Annals of Operations Research, Springer, vol. 191(1), pages 115-135, November.
    9. Onderstal, Sander, 2009. "Bidding for the unemployed: An application of mechanism design to welfare-to-work programs," European Economic Review, Elsevier, vol. 53(6), pages 715-722, August.
    10. Ruina Yang & Lijun Ma, 2017. "Two-part tariff contracting with competing unreliable suppliers in a supply chain under asymmetric information," Annals of Operations Research, Springer, vol. 257(1), pages 559-585, October.
    11. Tiaojun Xiao & Xiangtong Qi, 2016. "A two-stage supply chain with demand sensitive to price, delivery time, and reliability of delivery," Annals of Operations Research, Springer, vol. 241(1), pages 475-496, June.
    12. Antal-Pomázi, Krisztina, 2012. "Public Procurement as Auction – Theoretical Models and Practical Problems," Public Finance Quarterly, Corvinus University of Budapest, vol. 57(4), pages 381-393.
    13. Li, Ying & Gupta, Sudheer, 2011. "Strategic capability investments and competition for supply contracts," European Journal of Operational Research, Elsevier, vol. 214(2), pages 273-283, October.
    14. Jin, Mingzhou & Junfang Yu, Andrew, 2015. "Procurement auctions and supply chain performance," International Journal of Production Economics, Elsevier, vol. 162(C), pages 192-200.
    15. Pooya Farahvash & Tayfur Altiok, 2008. "Application of multi-dimensional procurement auction in single-period inventory models," Annals of Operations Research, Springer, vol. 164(1), pages 229-251, November.
    16. Li Li & Li Jiang & Liming Liu, 2012. "Service and Price Competition When Customers Are Naive," Production and Operations Management, Production and Operations Management Society, vol. 21(4), pages 747-760, July.
    17. Erica L. Plambeck & Terry A. Taylor, 2007. "Implications of Renegotiation for Optimal Contract Flexibility and Investment," Management Science, INFORMS, vol. 53(12), pages 1872-1886, December.
    18. Werner Hölzl & Michael Böheim & Michael Klien & Eva Pichler, 2017. "Das öffentliche Beschaffungswesen im Spannungsfeld zwischen Billigst- und Bestbieterprinzip," WIFO Studies, WIFO, number 59256.
    19. Fangruo Chen, 2007. "Auctioning Supply Contracts," Management Science, INFORMS, vol. 53(10), pages 1562-1576, October.
    20. Yang, Fiona X. & Zhang, Rachel Q. & Zhu, Kaijie, 2017. "Should purchasing activities be outsourced along with production?," European Journal of Operational Research, Elsevier, vol. 257(2), pages 468-482.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:52:y:2006:i:6:p:881-896. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.