Using Procurement Service Providers in Supplier Screening

35 Pages Posted: 4 Nov 2014

See all articles by Zhixi Wan

Zhixi Wan

The University of Hong Kong - Faculty of Business and Economics

Sripad K. Devalkar

Indian School of Business

Date Written: November 4, 2014

Abstract

A buyer engages a procurement service provider (PSP) to short-list pre-screened suppliers for final selection. The PSP can exert costly effort to include promising candidates that have a higher probability to be deemed qualified by the buyer. The buyer optimizes two key decision variables in her contract with the PSP: the short-list size and the performance bonus. We solve a mixed-integer program to characterize the optimal solution and provide a fast algorithm to compute the optimal decisions. We find that the number of candidates short-listed and the PSP's effort are substitutes in the sense that they both increase the probability of the buyer finding a qualified supplier. The buyer prefers to offer a performance bonus if and only if the fixed fees are sufficiently high. We also find that when the buyer has the choice to re-engage the PSP until finding a qualified supplier, the buyer may still prefer a single engagement when using a performance bonus. These managerial insights are robust when the buyer seeks multiple qualified suppliers to form a supply base.

Suggested Citation

Wan, Zhixi and Devalkar, Sripad K., Using Procurement Service Providers in Supplier Screening (November 4, 2014). Available at SSRN: https://ssrn.com/abstract=2518897 or http://dx.doi.org/10.2139/ssrn.2518897

Zhixi Wan

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Sripad K. Devalkar (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

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