Hidden Discount in Sourcing

Posted: 27 Mar 2014 Last revised: 4 May 2016

Jussi Keppo

National University of Singapore - NUS Business School

Jie Ning

Case Western Reserve University - Weatherhead School of Management

Romesh Saigal

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Jingxing Wang

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Date Written: June 27, 2015

Abstract

We introduce "indifference price" as the risk-adjusted unit price a supplier should charge for its customer’s random demand, given its flexible but limited capacity. The gap between this indifference price and the unit price used in practice, which is not adjusted for risk, then gives a hidden discount received by the supplier’s customers. Calibrating our model using a data set of a Norwegian bumper beam supplier, we show that this hidden discount rises in the customer’s order size. Further, customers with more volatile orders receive higher discount.

Keywords: Order quantity risk, flexible capacity, indifference price, just-in-time sourcing

JEL Classification: L11, L62

Suggested Citation

Keppo, Jussi and Ning, Jie and Saigal, Romesh and Wang, Jingxing, Hidden Discount in Sourcing (June 27, 2015). Available at SSRN: https://ssrn.com/abstract=2416273 or http://dx.doi.org/10.2139/ssrn.2416273

Jussi Keppo

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Jie Ning (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

Department of Operations
11119 Bellflower Rd
Cleveland, OH 44106
United States

Romesh Saigal

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

Jingxing Wang

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
670
PlumX