Carrots or Sticks? Improving Social and Environmental Compliance at Suppliers Through Incentives and Penalties

Firms are increasingly looking to eradicate social and environmental non‐compliances at their suppliers in response to increasing regulations, consumer demand, potential for supply chain disruptions, and to improve their social, environmental, and economic supply chain performance. This study develops a model of the relationship between the buyer's supplier incentives and penalties for the supplier's social and environmental compliance, and the outcomes in terms of reduction in supplier social and environmental violations as well as the buyer's own operating costs. This model is tested empirically through analysis of a dataset of opinion‐based survey responses from practitioners at 334 companies across 17 industries. The analysis finds specific penalties and incentives that are positively associated with reduced supplier violations and reduced buyer operating costs. In particular, offering suppliers incentives of increased business and training for improving social and environmental performance is strongly associated with a reduction in both violations and operating costs.     

Price and Service Competition in an Outsourced Supply Chain

We consider a buyer who outsources the manufacturing of a product to multiple symmetric make‐to‐stock suppliers who compete on price and service (fill rate). The buyer allocates demand to the suppliers using a score function with an exponential form, which specifies the relative importance of price vs. service, in order to minimize his costs, while the suppliers choose their prices and fill rates to maximize their profits. For the case of dual‐sourcing, we characterize the optimal parameter of the exponential score function, considering the impact of the buyer's decisions on the suppliers, and considering how the suppliers compete against each other to earn a portion of the buyer's demand. We prove the existence of a unique equilibrium and characterize the equilibrium behavior of the system. We then consider a general number of suppliers and show that the equilibrium prices and fill rates, and the buyer's cost, are increasing in the number of suppliers. We compare these results to a model of single‐sourcing, in which the buyer is the Stackelberg leader and extracts all profits from the supplier. We find that the buyer always prefers single‐sourcing to multisourcing. Finally, we study a centralized system and use the results to develop a coordinating contract for the decentralized system.     

Flexibility or Cost Saving? Sourcing Decisions with Two Suppliers

This article studies a decentralized supply chain in which there are two suppliers and a single buyer. One supplier offers the quantity flexibility (QF) contract to the buyer, while the other offers the cheaper price. Under the QF contract, the buyer does not assume full responsibility for the forecast, yet the supplier guarantees the availability of the forecasted quantity with additional buffer inventory. On the other hand, the price‐only contract places full inventory burden on the buyer, but with a cheaper price. We study this problem from the buyer's perspective and solve for the buyer's optimal procurement and forecasting decisions. We identify areas where flexibility and cheaper price have an advantage, one over the other. Our results indicate that the buyer significantly benefits from having multiple sources of supply. We also find that, from the system's standpoint, a multisupplier system may outperform a single‐supplier supply chain under certain conditions. Interestingly, we observe that providing too much flexibility may benefit the low‐price supplier rather than benefiting the QF supplier. We discuss the managerial implications and provide directions for future research opportunities.     

An investigation into E-business service in the UK telecommunication manufacturing industry

Nowadays, suppliers’ product and service quality has risen in importance with a manufacturer’s push to develop core competencies and capitalise on global operations and markets. However, due to the complex features of business service, suppliers are facing significant challenges in providing service effectively and developing business collaboration. This is further complicated by the development of information and communication technologies (ICTs). This paper thus attempts to investigate the factors influencing buyers’ e-service (EBS) requirements and the impact of these requirements on business collaboration. Based on a questionnaire survey with 500 UK telecommunication manufacturers, this research identifies buyers’ different EBS requirements for different types of suppliers and the impact of ICTs on EBS requirements. While for suppliers our findings provide insights into buyers’ EBS requirements, they can help buyers to develop appropriate supplier selection criteria. The findings also contribute to a better understanding of the development of buyer and supplier business collaboration.     

Profit Seeking vs. Survival Seeking: An Analytical Study of Supplier's Behavior and Buyer's Subsidy Strategy

Supplier default is common in emerging markets. Suppliers under the threat of default have different objectives from profit‐seeking companies. This paper analytically tests how profit‐seeking or survival‐seeking behavior, single‐period or two‐period consideration, and buyer's subsidy influence the supplier's and buyer's final utilities. The results show that under single‐period consideration, the supplier's survival‐seeking strategy in fact drives more start‐ups or small suppliers out of business when the competition becomes severe; under two‐period consideration, no matter which strategy (profit‐seeking or survival‐seeking) the supplier selects, the second‐period price and profit are always higher than those of the first period. Furthermore, we find that providing subsidy is an effective way for buyer to keep suppliers’ competition at a certain level on the behalf of buyer's interest. By numerically estimating the benefits associated with the cost of subsidy, we provide a basis for understanding the cost–benefit analysis of buyer's subsidy strategy.     

Requirement or Promise? An Analysis of the First‐Mover Advantage in Quality Contracting

Quality contracting is critical and challenging due to the many unique issues related to quality. In this study, we analyze the first‐mover right in quality contracting by considering two different strategies for the buyer: the quality requirement strategy (QR) where buyer moves first by posting quality requirement to suppliers and quality promise strategy (QP) where buyer voluntarily gives up the first‐mover right to suppliers to ask them to promise quality. We study which strategy (1) better encourages suppliers' quality improvement efforts and (2) leads to a higher expected profit for the buyer. To analyze the drivers behind the buyer's choice between QR and QP, we start with the basic model where buyer faces only one supplier who has the opportunity to make quality improvements. We then gradually add other business features such as information asymmetry and supplier competition, analyzing how each feature adds/changes the driving forces and how they interact in the buyer's decision between QR and QP. We consider both the case where the wholesale price is fixed (when the buyer has the power to dictate price or price is set by the market) and the case where the wholesale price is included as a variable (when price is part of the negotiation). We find that QP always leads to the first‐best quality efforts from the supplier(s) while QR limits their efforts. However, this does not guarantee higher expected profit for the buyer under QP. We provide insightful guidelines in buyer's choice between QP and QR. This research enriches the limited literature on quality contracting with quality improvement opportunity and asymmetric information.     

Push or Pull? Auctioning Supply Contracts

Consider a buyer, facing uncertain demand, who sources from multiple suppliers via online procurement auctions (open descending price‐only auctions). The suppliers have heterogeneous production costs, which are private information, and the winning supplier has to invest in production capacity before the demand uncertainty is resolved. The buyer chooses to offer a push or pull contract, for which the single price and winning supplier are determined via the auction. We show that, with a pull contract, the buyer does not necessarily benefit from a larger number of suppliers participating in the auction, due to the negative effect of supplier competition on the incentive of supplier capacity investment. We thus propose an enhanced pull mechanism that mitigates this effect with a floor price. We then analyze and compare the outcomes of auctions for push and (enhanced) pull contracts, establishing when one form is preferred over the other based on the buyer's profits. We also compare our simple, price‐only push and pull contract auctions to the optimal mechanisms, benchmarking the performance of the simple mechanisms as well as establishing the relative importance of auction design and contract design in procurement auctions.     

Procurement strategies in the presence of the spot market—an analytical framework

This paper investigates a problem in which a buyer can procure from a regular supplier as well as from a supplier in a spot market, possibly formed over the Internet. The contract with the regular supplier specifies a predetermined order volume and price, while the spot market has unlimited supply but a varying spot price. We analyse this problem from a buyer/supplier perspective, and an analytical model is developed to analyse two distinctive procurement strategies: the pure procurement system (PS) and the mixed procurement system of regular supplier with a supplier in spot markets (MS). Without loss of generality, we obtained a closed-forms solution that enabled us to provide numerical analysis on the procurement strategies, and allowed us to compare further the different characteristics between PS and MS. The results of our analysis demonstrate that the use of spot market could effectively mitigate the risk associated with demand uncertainty facing the buyer. The results also show that adopting MS can generate a higher buyer's profit than the PS, and significant supply-chain profit improvements can indeed be achieved through buyer/supplier coordination. Furthermore, spot price volatility leads to the facilitation of the use of spot markets, improving the buyer and the supply-chain profitability.     

Procurement with Reverse Auction and Flexible Noncompetitive Contracts

This article investigates a hybrid procurement mechanism that combines a reverse auction with flexible noncompetitive contracts. A buyer adopts such mechanism to procure multiple units of a product from a group of potential suppliers. Specifically, the buyer first offers contracts to some suppliers who, if accepting the contract, do not participate in the auction while committing to selling a unit to the buyer at the price of the subsequent auction. For the suppliers rejecting the offers, they can join the subsequent auction with the other suppliers to compete on the remaining units. When the buyer offers only one flexible noncompetitive contract, we find that the selected supplier may accept the offer regardless of whether he knows his exact cost information. Meanwhile, the buyer can benefit from offering such a contract, as opposed to solely conducting a regular reverse auction or offering a noncompetitive contract that does not allow suppliers declining offers to join the subsequent auction. Moreover, we find that the suppliers' information about their own costs has a significant impact on the buyer's decision. When the buyer makes multiple offers, we analyze the resulting game behavior of the selected suppliers and demonstrate that the buyer can benefit more than just offering one such contract. Therefore, the hybrid procurement mechanism can be mutually beneficial for both the buyer and the selected suppliers.     

Reverse Auctions to Innovate Procurement Processes: Effects of Bid Information Presentation Design on a Supplier's Bidding Outcome

Information technologies (ITs) are being used to innovate various procurement processes. This research study focuses on the supplier‐side effects of IT design choices to conduct reverse auctions, which are increasingly used to procure a wide range of products and services. IT–enabled reverse auctions enhance supplier participation across geographical boundaries, leading to more efficient pricing. However, there are growing concerns about the adverse effects of IT–enabled reverse auctions on a supplier's performance. Supplier‐side issues are gaining prominence in the reverse auction literature and are critical for the long‐term success of reverse auctions. Therefore, we focus on suppliers’ bidding outcomes and assess how the design of an IT–enabled reverse auction facilitates the auction bidding outcomes of participating suppliers. Specifically, we examine the effects of two types of bid information presentation design—full price visibility and partial price visibility—on supplier's auction bidding outcomes, across auctions with different cost certainty and suppliers bargaining power vis‐à‐vis the buyer. The results of this study contribute new knowledge about the ways to use IT for creating effective auction designs and innovating procurement through auctions to enhance both the buyer's and suppliers’ performance. We present the detailed theoretical contributions of our study and discuss the managerial implications for designers of reverse auctions.      

Supply Disruptions,Heterogeneous Beliefs,and Production Efficiencies

Recent years have witnessed the pervasive supply disruptions and their impacts on supply chain performance. In this study, we investigate the optimal procurement design with supply disruptions and heterogeneous beliefs between the buyer and the supplier. We examine the impact of information asymmetry on the supplier's belief, the control right of the backup production, and the verifiability of supply disruption. The belief heterogeneity creates speculative gains and losses because the buyer and the supplier hold different estimates of the disruption probability. We demonstrate that the buyer's incentive to exploit this belief heterogeneity leads to real production inefficiencies in different scenarios. The production efficiency is not necessarily improved with more transparent information. Moreover, a very pessimistic supplier may have no incentive to invest in improving the reliability even if this is costless, and the supplier may produce more when the expected production cost becomes higher. When the buyer sees some value in using the supplier's estimate to update his own belief, we find that the main results hold unless the buyer completely abandons his belief.     

Capacity Allocation among Multiple Suppliers in an Electronic Market

An electronic marketplace typically provides industrial suppliers an alternative option for selling their capacity in addition to the traditional open market. However, suppliers face different sets of costs and risks in open market and in electronic market. Consequently, suppliers participating in an electronic market are likely to offer their capacity at a different price compared with traditional open market. We analyze this problem and derive the price‐capacity function for the supplier. We also derive a basis for allocating buyer's requirements among multiple suppliers so as to minimize his cost. Our model shows that suppliers with large capacities would quote a lower price in the electronic market. It also predicts that the unit bid price increases with bid quantity in the electronic market. Based on the price‐capacity curve, we model a scenario where the buyer announces, a priori, the number of suppliers to be selected for award of a contract that will minimize its costs.     

Mechanisms to Induce Buyer Forecasting: Do Suppliers Always Benefit from Better Forecasting?

In this study, we consider a supplier's contract offerings to a buyer who may obtain improved forecasts for her demand over time. We investigate how the supplier can take advantage of the buyer's better forecasts and what kind of contracts he should offer to the buyer in order to maximize his profits. We model a natural forecast evolution where the buyer can obtain a more accurate forecast closer to the selling season. We assume there is information asymmetry between the buyer and the supplier at all times in that the buyer understands her demand better than the supplier. Three types of contracts that the supplier can offer are considered: (1) one where a contract is offered before the buyer has a chance to obtain improved forecasts, (2) one where a contract is offered after the buyer has obtained improved forecasts, and (3) a contingent (dynamic) contract which offers an initial contract to the buyer before she obtains improved forecasts, followed by a later contract (contingent on the initial contract) offered after improved forecasts have been obtained. We consider two scenarios: (1) where the supplier is certain that the buyer can obtain more accurate forecasts over time, and (2) where the supplier is uncertain about the buyer's forecasting capability (or forecasting cost). In the first scenario, we show that among the three types of contracts, the contingent contract is always the most profitable for the supplier. Furthermore, using the contingent contract, the supplier always benefits from higher accuracy of the buyer's demand forecasts. In the second scenario, we explicitly model the supplier's level of certainty about the buyer's capability of obtaining better forecasts, and explore how the supplier can design contracts to induce the buyer to obtain better forecasts when she is capable.     

The Effect of Learning and Integration Investment on Manufacturing Outsourcing Decisions: A Game Theoretic Approach

We introduce a two‐period Stackelberg game of a supplier and buyer. We recognize that learning from manufacturing experience has many advantages. Consistent with the literature, we assume both the buyer and supplier realize reductions in their respective production costs in period 2 due to volume‐based learning from period 1 production. In addition, we introduce another learning concept, the future value, to capture the buyer's benefits of transferring current manufacturing experience for the design and development of future products and technologies. In contrast to the literature, we allow the supplier two mechanisms to impact the buyer's outsourcing decision: price and the investment in integration process improvement (IPI) that reduces the buyer's unit cost of integration. IPI may include the investment in new materials, specialized technology, or the re‐design of the integration process. Conditions are given whereby the buyer partially outsources component demand as opposed to fully outsourcing or fully producing in‐house. Furthermore, conditions are given characterizing when the supplier's price and investment in IPI are substitute strategies versus complements. Both analytic and numerical results are presented.     

Drivers and Outcomes of Long‐term Orientation in Cooperative Relationships

We argue in this paper that a buyer may deliberately develop long‐term orientation as a governance mechanism to deal with risks arising from exchange hazards, and to reduce the opportunistic behaviour of a supplier. While the exchange hazards of asset specificity pose a safeguarding problem, those of market uncertainty pose an adaptation problem. We test our model on a sample of 221 procurement partnerships. Our results show that satisfactory prior history of a supplier, asset specificity of the buyer and market uncertainty are all positively related to a buyer's long‐term orientation towards a supplier. Consistent with the idea that asset specificity and market uncertainty pose different governance problems, we find that satisfactory prior history reduces the positive relationship between asset specificity and a buyer's long‐term orientation, but enhances the positive relationship between market uncertainty and a buyer's long‐term orientation. We also find that a buyer's long‐term orientation fully mediates the relationship between satisfactory prior history and a supplier's opportunistic behaviour. Finally, implications on the theory and the practices of relationship governance are discussed.     

Managing Engineering Design for Competitive Sourcing in Closed‐Loop Supply Chains

We examine the strategic interplay between a buyer's design decision and the ensuing competition between suppliers in a three‐tier closed‐loop supply chain setting with significant recycling considerations. The nature of the engineering design decision in our research entails choice of integral versus modular design that has direct implications for the input raw material waste and ensuing competition between suppliers (i.e., incumbent and new). Whereas the integral design requires a large blank and generates excessive material scrap, the modular design reduces the generated scrap, and enhances cut‐to‐fit modularity, but incurs joining cost and yield loss. The incumbent supplier who supports the status quo choice of integral design can effectively recycle excessive material waste, as it is strategically located close to the source of material. The engineering design team at our study firm is currently exploring the option to source from alternative suppliers that can support either integral or modular designs, but have significantly lower effectiveness in recycling scrap material. We characterize the buyer's price sensitivity levels, component characteristics, supply chain configurations, and virgin and scrap specialty material prices that yield various design and sourcing policy alternatives. The buyer's optimal policy choice, the ensuing price–demand dynamics, and the resulting recycling implications demonstrate that the buyer can benefit from strategically tailoring his design decisions to affect the suppliers' material requirements and costs. We show that utilizing an alternative supply option is particularly valuable for components made from a material with a low price differential in virgin and scrap forms in supply chains wherein the new supplier base can recycle effectively. In such cases, the buyer induces severe price competition by dual sourcing the integral design, and competition may negate the seemingly obvious benefits of operational improvements (e.g., higher scrap material return rate).      

Optimal Descending Mechanisms for Constrained Procurement

Descending mechanisms for procurement (or, ascending mechanisms for selling) have been well‐recognized for their simplicity from the viewpoint of bidders—they require less bidder sophistication as compared to sealed‐bid mechanisms. In this study, we consider procurement under each of two types of constraints: (1) Individual/Group Capacities: limitations on the amounts that can be sourced from individual and/or subsets of suppliers, and (2) Business Rules: lower and upper bounds on the number of suppliers to source from, and on the amount that can be sourced from any single supplier. We analyze two procurement problems, one that incorporates individual/group capacities and another that incorporates business rules. In each problem, we consider a buyer who wants to procure a fixed quantity of a product from a set of suppliers, where each supplier is endowed with a privately known constant marginal cost. The buyer's objective is to minimize her total expected procurement cost. For both problems, we present descending auction mechanisms that are optimal mechanisms. We then show that these two problems belong to a larger class of mechanism design problems with constraints specified by polymatroids, for which we prove that optimal mechanisms can be implemented as descending mechanisms.     

The effect of supplier development on outsourcing performance: the mediating roles of opportunism and flexibility

Abstract

In this increasingly competitive business environment, firms utilise outsourcing as a strategic tool to leverage globally dispersed resources so that they may focus on their core competencies and improve efficiency. The more firms rely on outsourcing, the more they depend on their suppliers, and the more important it is to manage and develop suppliers in order to achieve and maximise the benefits of outsourcing. This paper explores the impact of supplier development on outsourcing performance. Structural equation modelling was used to analyse data collected from 213 manufacturing firms in China. The results indicate that supplier development has a strong direct positive impact on outsourcing performance, and that supplier development also leads to enhanced outsourcing performance through reducing outsourcing opportunism risk and improving outsourcing flexibility. In addition to making a contribution to current theories of outsourcing, our findings also provide outsourcing managers with practical understanding and insights about the role of supplier development in enhancing outsourcing performance.