Marketing Papers
Document Type
Technical Report
Date of this Version
6-2006
Publication Source
Management Science
Volume
52
Issue
6
Start Page
881
Last Page
896
DOI
10.1287/mnsc.1060.0510
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.
Copyright/Permission Statement
Originally published in Management Science © 2006 INFORMS
This is a pre-publication version. The final version is available at http://dx.doi.org/10.1287/mnsc.1060.0510
Keywords
mechanism design, reverse auctions, supply chain coordination, game theory, renegotiation
Recommended Citation
Cachon, G. P., & Zhang, F. (2006). Procuring Fast Delivery: Sole Sourcing with Information Asymmetry. Management Science, 52 (6), 881-896. http://dx.doi.org/10.1287/mnsc.1060.0510
Included in
Business Administration, Management, and Operations Commons, Business Analytics Commons, Business and Corporate Communications Commons, Management Sciences and Quantitative Methods Commons, Marketing Commons, Operations and Supply Chain Management Commons
Date Posted: 15 June 2018
This document has been peer reviewed.