An Incentive Effect of Multiple Sourcing

30 Pages Posted: 5 Jun 2012

See all articles by Stanley Baiman

Stanley Baiman

University of Pennsylvania - Accounting Department

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: July 2004

Abstract

We consider a supply chain with one manufacturer who assembles an end-product consisting of two components (A and B), where each component is purchased from multiple outside suppliers. The manufacturer’s decision as to the contract to offer each supplier is complicated by two factors: (1) each potential supplier is self-interested and privately-informed as to his marginal cost of production; and (2) any A parts delivered in excess of B parts (or vice versa) cannot be inventoried but must be disposed of at no value. Thus, the manufacturer must choose the contract to offer each so as to coordinate or balance their production, while taking into consideration their selfinterested behavior. We demonstrate that increasing the number of suppliers mitigates (but does not entirely eliminate) the production distortions arising from these two factors. Hence, we show that increasing the supplier base can have efficiency enhancing effects that have not been previously described in the literature.

Keywords: Quality, multiple sourcing, contracting, asymmetric information

JEL Classification: D82, L14, L15, L23, L60

Suggested Citation

Baiman, Stanley and Netessine, Serguei, An Incentive Effect of Multiple Sourcing (July 2004). Available at SSRN: https://ssrn.com/abstract=2077658 or http://dx.doi.org/10.2139/ssrn.2077658

Stanley Baiman

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6782 (Phone)
215-573-2054 (Fax)

Serguei Netessine (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
62
Abstract Views
619
rank
351,022
PlumX Metrics