A dynamic model of supplier switching

While a broad branch of literature deals with the development of buyer–supplier relationships, limited research exists under which circumstances a buyer should terminate such a relationship and switch to a new supplier. Recently, Wagner and Friedl (2007) have developed a framework to analyze a static one-shot supplier switching decision when the buyer has asymmetric information about the supplier’s production costs. We extend their basic framework to a dynamic one, assuming that the supplier learns the production costs over time when he sets up the production process. Since the supplier’s cost information at the individual stages crucially determines the setup and the switching decision, it becomes essential for supply chain management to provide proper incentives so that the supplier reveals his cost information truthfully over time. We characterize the optimal setup and switching strategy as well as the optimal supply chain contract. We also compare our findings with those of the static setting to provide further insights.     

Supply chain coordination with controllable lead time and asymmetric information

This paper considers coordinated decisions in a decentralized supply chain consisting of a vendor and a buyer with controllable lead time. We analyze two supply chain inventory models. In the first model we assume the vendor has complete information about the buyer’s cost structure. By taking both the vendor and the buyer’s individual rationalities into consideration, a side payment coordination mechanism is designed to realize supply chain Pareto dominance. In the second model we consider a setting where the buyer possesses private cost information. We design the coordination mechanism by using principal-agent model to induce the buyer to report his true cost structure. The solution procedures are also developed to get the optimal solutions of these two models. The results of numerical examples show that shortening lead time to certain extent can reduce inventory cost and the coordination mechanisms designed for both symmetric and asymmetric information situations are effective.     

Sourcing under incomplete information and negative capacity-cost correlation

We study a sourcing problem where a buyer reserves capacity from a set of suppliers. The suppliers have finite capacity and their unit production cost is a decreasing function of their capacity, implying scale economies. The capacity of each supplier and therefore the cost is his private information. The buyer and other suppliers only know the probability distribution of the supplier’s capacity. The buyer’s demand is random and she has to decide how much capacity to reserve in advance from a subset of suppliers and how much to source from marketplace. In this study we determine the buyer’s optimum reservation quantity and the size of the supply base. We find the presence of such capacity cost correlation leads to supply base reduction.     

Strategic capability investments and competition for supply contracts

Suppliers often make proactive investments to strategically position themselves to win contracts with a large buyer. Such investments reduce the suppliers’ variable costs of serving the buyer’s demand. We show that an auction mechanism does not always benefit the buyer, the supply chain, or the society. We identify scenarios where the buyer can implement the supply chain and socially optimal solution by committing to a bilateral relationship with fair reimbursement, and forgoing the benefits of competition altogether. We explore the role of commitment by the buyer (to a procurement mechanism) and by the suppliers (to an investment level) by analyzing different timing games under symmetric and asymmetric information about suppliers’ types. We show that it never benefits anyone for the suppliers to commit first. Equilibrium investments and cost structures depend upon the buyer’s bargaining power (opportunity cost). However, the winning supplier’s investments are almost always below the supply chain optimal level.     

Impact of product pricing and timing of investment decisions on supply chain co-opetition

In supply chain co-opetition, firms simultaneously compete and co-operate in order to maximize their profits. We consider the nature of co-opetition between two firms: The product supplier invests in the technology to improve quality, and the purchasing firm (buyer) invests in selling effort to develop the market for the product before uncertainty in demand is resolved. We consider three different decision making structures and discuss the optimal configuration from each firm’s perspective. In case 1, the supplier invests in product quality and sets the wholesale price for the product. The buyer then exerts selling effort to develop the market and following demand potential realization, sets the resale price. In case 2, the supplier invests in product quality followed by the buyer’s investment in selling effort. Then, after demand potential is observed, the supplier sets the wholesale price and the buyer sets the resale price. Finally, in case 3, both firms simultaneously invest in product quality and selling effort, respectively. Subsequently, observing the demand potential, the supplier sets the wholesale price and the buyer sets the resale price. We compare all configuration options from both the perspective of the supplier and the buyer, and show that the level of investment by the firms depends on the nature of competition between them and the level of uncertainty in demand. Our analysis reveals that although configuration 1 results in the highest profits for the integrated channel, there is no clear dominating preference on system configuration from the perspective of both parties. The incentives of the co-opetition partners and the investment levels are mainly governed by the cost structure and the level of uncertainty in demand. We examine and discuss the relation between system parameters and the incentives in desiging the supply contract structure.     

Sourcing decisions with capacity reservation contracts

By committing to long-term supply contracts, buyers seek to lower their purchasing costs, and have products delivered without interruption. When a long-term contract is available, suppliers are less pressured to find new customers, and can afford to charge a price lower than the prevailing spot market price. We examine sourcing decisions of a firm in the presence of a capacity reservation contract that this firm makes with its long-term supplier in addition to the spot market alternative. This contract entails delivery of any desired portion of a reserved fixed capacity in exchange for a guaranteed payment by the buyer. We investigate rational actions of the two parties under two different types of periodic review inventory control policies used by the buyer: the two-number policy, and the base stock policy. When typical demand probability distributions are considered, inclusion of the spot market source in the buyer’s procurement plan significantly reduces the capacity commitments from the long-term supplier.     

The newsvendor problem: Review and directions for future research

In this paper, we review the contributions to date for analyzing the newsvendor problem. Our focus is on examining the specific extensions for analyzing this problem in the context of modeling customer demand, supplier costs, and the buyer risk profile. More specifically, we analyze the impact of market price, marketing effort, and stocking quantity on customer demand; how supplier prices can serve as a coordination mechanism in a supply chain setting; integrating alternative supplier pricing policies within the newsvendor framework; and how the buyer’s risk profile moderates the newsvendor order quantity decision. For each of these areas, we summarize the current literature and develop extensions. Finally, we also propose directions for future research.     

Supplier switching decisions

In order to maximize profit, a buying firm should continuously search for and access sources which offer more favorable prices. While the literature is replete with works on the formation and development of buyer–supplier relationships, there is surprisingly only scarce research on the termination of such relationships and supplier switching. Using the concept of switching costs in a principal-agent framework, we at first analyze whether a firm switches the entire or a partial quantity to an alternative supplier when there is either symmetric or asymmetric information about the alternative supplier’s cost structure. Information asymmetry results in inert supplier switching decisions. Subsequently, we extend our model and take competitive reactions of the incumbent supplier and economies of scale effects into consideration. We find conditions under which ‘no’, ‘partial’ and ‘complete’ switching occurs, which depend on the buying firm’s beliefs about the alternative supplier’s unit costs, switching costs, the price offered by the incumbent supplier, and refinements of the price offered by the incumbent supplier due to competitive reactions and economies of scale. Broader implications for supplier relationship management and sourcing strategy decisions are also provided.     

Buyer’s response to a temporary price reduction incorporating freight costs

In this paper, we characterize the buyer’s response to a temporary price reduction. Although there have been many studies that have considered the above problem, most of those studies assume that the buyer orders FOB (free on board) destination and that the freight charges are included in the supplier’s unit price. Our model thus becomes applicable for a buyer whose strategy is to include transportation costs in their purchase decisions. The buyer may want direct control on his inbound logistics costs. The company may have outsourced its logistics function and as a result is charged for freight as invoiced by the public motor carrier. In some cases, the supplier may only allow for orders that are FOB origin. Our model allows for less-than-truckload as well as truckload rates. Freight cost for a LTL shipment is modeled using tariffs set by public carriers in practice. These tariffs generally involve 6–7 breakpoints in terms of the weight of the shipment. Another complication in practice is that the shipper/buyer has an option to over-declare the weight of the shipment.     

The impact of cost uncertainty on the location of a distribution center

The location of a distribution center (DC) is a key consideration for the design of supply chain networks. When deciding on it, firms usually allow for transportation costs, but not supplier prices. We consider simultaneously the location of a DC and the choice of suppliers offering different, possibly random, prices for a single product. A buying firm attempts to minimize the sum of the price charged by a chosen supplier, and inbound and outbound transportation costs. No costs are incurred for switching suppliers. We first derive a closed-form optimal location for the case of a demand-populated unit line between two suppliers offering deterministic prices. We then let one of the two suppliers offer a random price. If the price follows a symmetric and unimodal distribution, the optimal location is closer to the supplier with a lower mean price. We also show the dominance of high variability: the buyer can decrease the total cost more for higher price variability for any location. The dominance result holds for normal, uniform, and gamma distributions. We propose an extended model with more than two suppliers on a plane and show that the dominance result still holds. From numerical examples for a line and a plane, we observe that an optimal location gets closer to the center of gravity of demands as the variability of any supplier’s price increases.     

A capacity reservation game for suppliers with multiple blocks of capacity

This paper studies a supplier competition model in which a buyer reserves capacity from a number of suppliers that each have multiple blocks of capacity (e.g., production or power plants). The suppliers each submit a bid that specifies a reservation price and an execution price for every block, and the buyer determines what blocks to reserve. This game involves both external competition between suppliers and internal competition between blocks from each supplier. We characterize the properties of pure-strategy Nash equilibria for the game. Such equilibria may not always exist, and we provide the conditions under which they do.     

To reveal or not to reveal? Strategic disclosure of private information in negotiation

Within the bargaining literature, it is widely held that negotiators should never reveal information that will lead to disclosure of their reservation prices. We analyze a simple bargaining and search model in which the informed buyer can choose to reveal his cost of searching for an outside price (which determines his reservation price) to the uninformed seller. We demonstrate that buyers can be made better off by revealing their search cost. More interestingly, we also find that, depending on the assumed distribution of search costs, sometimes buyers with relatively low search costs should reveal their private information whereas in other cases buyers with relatively high search costs should do so. We then test our model experimentally and find that subjects’ behavior is not entirely consistent with theoretical predictions. In general, bargainers’ behavior is better explained by a bounded rationality model similar to “fictitious play”.     

Contracting with asymmetric demand information in supply chains

We solve a buyback contract design problem for a supplier who is working with a retailer who possesses private information about the demand distribution. We model the retailer’s private information as a space of either discrete or continuous demand states so that only the retailer knows its demand state and the demand for the product is stochastically increasing in the state. We focus on contracts that are viable in practice, where the buyback price being strictly less than the wholesale price, which is itself strictly less than the retail price. We derive the optimal (for the supplier) buyback contract that allows for arbitrary allocation of profits to the retailer (subject to the retailer’s reservation profit requirements) and show that in the limit this contract leads to the first-best solution with the supplier keeping the entire channel’s profit (after the retailer’s reservation profit).     

Integrated inventory models considering the two-level trade credit policy and a price-negotiation scheme

This paper develops the integrated inventory models with permissible delay in payment, in which customers’ demand is sensitive to the buyer’s price. The models consider the two-level trade credit policy in the vendor–buyer and buyer–customer relationships in supply chain management. A simple recursive solution procedure is proposed for the integrated models to determine the buyer’s optimal pricing and production/order strategy. Although the total profit from the buyer and vendor increases together, the buyer’s share lessens. To compensate the buyer’s loss due to the cooperative relationship, a negotiation system is presented in order to allocate the profit increase to the vendor and buyer to determine the pricing and production/order strategy. A numerical example and sensitivity analysis are provided to illustrate the proposed model. The results indicate that the total profit from the buyer and vendor together can increase, although a price discount is given to the buyer in the proposed models.     

A bargaining model with asymmetric information for a single supplier–single buyer problem

Banerjee’s joint economic lot size (JELS) model represents one approach to minimizing the joint total relevant cost of a buyer and a supplier by using a joint optimal order and production policy. The implementation of a jointly optimal policy requires coordination and cooperation. Should the buyer have the market power to implement his own optimal policy as that one to be used in the exchange process no incentive exists for him to choose a joint optimal policy. A joint policy can therefore only be the result of a bargaining process between the parties involved. The supplier may make some sort of concession such as a price discount or a side payment in order to influence the buyer’s order policy. A critical assumption made throughout in supply chain literature is that the supplier has complete knowledge about the buyer’s cost structure. Clearly, this assumption will seldom be fulfilled in practice. The research presented in this paper provides a bargaining model with asymmetric information about the buyer’s cost structure assuming that the buyer has the power to impose its individual optimal policy.     

Competitive strategies and market segmentation for suppliers with substitutable products

This research studies the competition between two coexisting suppliers in a two-echelon supply chain. The suppliers have different inventory cost structures (holding cost and setup cost). Each supplier offers one type of the two substitutable products to multiple buyers. Buyers’ preferences between the substitutable products differ. Each buyer has a particular order profile (order frequency and quantity). A buyer chooses between the suppliers based on the prices offered by both suppliers and his/her own preference. A Hotelling-type model is used to describe buyers’ preferences for the products. We are able to describe the conditions for buyers to switch between the suppliers, and therefore spot the buyer groups that may or may not switch when the suppliers compete. Pricing strategies for different buyer groups are suggested to the competitive suppliers accordingly. Furthermore, equilibrium prices, market segments, and overall profits for the suppliers are revealed based on Game Theory. An algorithm is also proposed to forecast buyers’ reactions to suppliers’ pricing strategies given the buyers’ order profiles and preferences between the substitutable products.     

A scenario-based stochastic model for supplier selection in global context with multiple buyers,currency fluctuation uncertainties,and price discounts

Suppliers network in the global context under price discounts and uncertain fluctuations of currency exchange rates have become critical in today’s world economy. We study the problem of suppliers’ selection in the presence of uncertain fluctuations of currency exchange rates and price discounts. We specifically consider a buyer with multiple sites sourcing a product from heterogeneous suppliers and address both the supplier selection and purchased quantity decision. Suppliers are located worldwide and pricing is offered in suppliers’ local currencies. Exchange rates from the local currencies of suppliers to the standard currency of the buyer are subject to uncertain fluctuations overtime. In addition, suppliers offer discounts as a function of the total quantity bought by the different customer’ sites over the time horizon irrespective of the quantity purchased by each site.     

Single-supplier/multiple-buyer supply chain coordination: Incorporating buyers’ expectations under vertical information sharing

We address the coordination problem in a single-supplier/multiple-buyer supply chain. The supplier wishes to coordinate the supply chain by offering quantity discounts. To obtain their complete cost information, the supplier exchanges his own cost parameters with buyers leading to vertical information sharing. The supplier thinks that the buyers, as they have access to supplier’s setup and holding cost information, may demand a portion of the anticipated coordination savings based on the partial information they hold about the cost structure of the entire supply chain. We model each buyer’s expectations based on her limited view of the entire supply chain which consists of herself and the supplier only. These expectations are then incorporated into the modeling of the supply chain, which results in a generalization of the traditional Stackelberg type models. We discuss alternative efficiency sharing mechanisms, and propose methods to design the associated discount schemes that take buyers’ expectations into account. In designing the discount schemes, we consider both price discriminatory and non-price discriminatory approaches. The study adds to the existing body of work by incorporating buyers’ expectations into a constrained Stackelberg structure, and by achieving coordination without forcing buyers to explicitly comply with the supplier’s replenishment period in choosing their order quantities. The numerical analysis of the coordination efficiency and allocation of the net savings of the proposed discount schemes shows that the supplier is still able to coordinate the supply chain with high efficiency levels, and retain a significant portion of the net savings.     

A procurement model using capacity reservation

In this paper we model a scenario where a buyer reserves capacity from one or more suppliers in the presence of demand uncertainty. We explicitly derive suppliers’ capacity reservation price, which is a function of their capacity, amount of capacity reserved by the buyer and other parameters. The buyer operates in a “built-to-order” environment and needs to decide how much capacity to reserve and from how many suppliers. For a strategy of equal allocation of capacity among the selected suppliers we develop closed form solutions and show that the model is robust to the number of suppliers from whom capacity is procured through reservation. When the parameters of demand distribution changes the supply base is likely to remain more or less the same. Our analysis further shows that increasing the number of pre-qualified suppliers does not provide significant advantages to the buyer. On the other hand, a pre-qualified supply base with greater capacity heterogeneity will benefit the buyer.     

Optimal policy for a dynamic,non-stationary,stochastic inventory problem with capacity commitment

This paper studies a single-product, dynamic, non-stationary, stochastic inventory problem with capacity commitment, in which a buyer purchases a fixed capacity from a supplier at the beginning of a planning horizon and the buyer’s total cumulative order quantity over the planning horizon is constrained with the capacity. The objective of the buyer is to choose the capacity at the beginning of the planning horizon and the order quantity in each period to minimize the expected total cost over the planning horizon. We characterize the structure of the minimum sum of the expected ordering, storage and shortage costs in a period and thereafter and the optimal ordering policy for a given capacity. Based on the structure, we identify conditions under which a myopic ordering policy is optimal and derive an equation for the optimal capacity commitment. We then use the optimal capacity and the myopic ordering policy to evaluate the effect of the various parameters on the minimum expected total cost over the planning horizon.