Collaborative Cost Reduction and Component Procurement under Information Asymmetry

43 Pages Posted: 11 Dec 2010 Last revised: 15 Mar 2012

See all articles by Sang-Hyun Kim

Sang-Hyun Kim

Yale School of Management

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: March 14, 2012

Abstract

During development of an innovative product there is often considerable uncertainty about component production cost, and it is of interest for both the manufacturer and the supplier to engage in a collaborative effort to reduce this uncertainty and lower the expected cost. Despite the obvious benefits this brings, the supplier may be reluctant to collaborate as he fears revealing his proprietary cost information. We investigate how information asymmetry and procurement contracting strategies interact to influence the supply chain parties' incentives to collaborate. We consider a number of procurement contracting strategies, and identify a simple strategy, Expected Margin Commitment (EMC), that effectively promotes collaboration. The manufacturer prefers EMC if collaboration leads to a large reduction in unit cost and/or demand variability is low. Otherwise, a screening contract based on price and quantity is preferred. We also find that, paradoxically, ex-post efforts to enhance supply chain efficiency may hinder ex-ante collaboration that precedes production.

Suggested Citation

Kim, Sang-Hyun and Netessine, Serguei, Collaborative Cost Reduction and Component Procurement under Information Asymmetry (March 14, 2012). INSEAD Working Paper No. 2012/33/TOM. Available at SSRN: https://ssrn.com/abstract=1723231 or http://dx.doi.org/10.2139/ssrn.1723231

Sang-Hyun Kim (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Serguei Netessine

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

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