The Relational Advantages of Intermediation

36 Pages Posted: 17 Oct 2010 Last revised: 18 Feb 2012

Elena Belavina

The University of Chicago Booth School of Business

Karan Girotra

INSEAD - Technology and Operations Management

Date Written: February 14, 2012

Abstract

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.

Keywords: Global Sourcing, Intermediairies, Supply Chain Relationships, Relational Contracts, Flexibility, Li & Fung, Repeated Games

Suggested Citation

Belavina, Elena and Girotra, Karan, The Relational Advantages of Intermediation (February 14, 2012). INSEAD Working Paper No. 2012/19/TOM. Available at SSRN: https://ssrn.com/abstract=1691991 or http://dx.doi.org/10.2139/ssrn.1691991

Elena Belavina (Contact Author)

The University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
+1 773 834-3038 (Phone)

HOME PAGE: http://www.chicagobooth.edu/faculty/bio.aspx?person_id=49970841600

Karan Girotra

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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