The Relational Advantages of Intermediation
The University of Chicago Booth School of Business
INSEAD - Technology and Operations Management
February 14, 2012
INSEAD Working Paper No. 2012/19/TOM
This paper provides a novel explanation for the use of supply chain intermediaries such as Li & Fung Ltd.. We find that even in the absence of the well-known transactional and informational advantages of mediation, intermediaries improve supply chain performance. In particular, intermediaries facilitate responsive adaptation of the buyers’ supplier base to their changing needs while simultaneously ensuring that suppliers behave as if they had long-term sourcing commitments from buying firms. In the face of changing buyer needs, an intermediary that sources on behalf of multiple buyers can responsively change the composition of future business committed to a supplier such that a sufficient level of business comes from the buyer(s) that most prefer this supplier. On the other hand, direct buyers that source only for themselves must provide all their committed business to a supplier from their own sourcing needs, even if they no longer prefer this supplier. Unlike existing theories of intermediation, our theory better explains the observed phenomenon that while transactional barriers and information asymmetries have steadily decreased, the use of intermediaries has soared, even among large companies such as Walmart.
Number of Pages in PDF File: 36
Keywords: Global Sourcing, Intermediairies, Supply Chain Relationships, Relational Contracts, Flexibility, Li & Fung, Repeated Games
Date posted: October 17, 2010 ; Last revised: February 18, 2012
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