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Outsourcing through competition: What is the best competition parameter?

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  • Elahi, Ehsan

Abstract

In this paper we consider a single buyer who wants to outsource the manufacturing of a product to N potential suppliers. The buyer's objective is to maximize the service level she receives from the suppliers. The suppliers compete for the buyer's demand based on a competition parameter which the buyer announces along with an allocation rule. We model each supplier as a make-to-stock queueing system. Using a simple proportional allocation function, we compare two competition parameters: service level and inventory level. We show that inventory competition creates a higher overall service level for the buyer. We also show an optimal form of competition parameter which can induce the maximum feasible service level. Our base model shows the results for the competition between identical suppliers. We then extend the results to a case where the suppliers are heterogeneous.

Suggested Citation

  • Elahi, Ehsan, 2013. "Outsourcing through competition: What is the best competition parameter?," International Journal of Production Economics, Elsevier, vol. 144(1), pages 370-382.
    • Handle: RePEc:eee:proeco:v:144:y:2013:i:1:p:370-382
    DOI: 10.1016/j.ijpe.2013.02.023
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    References listed on IDEAS

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    2. Xu, Su Xiu & Lu, Qiang & Huang, George Q. & Zhang, Ting, 2013. "Scope economies, market information, and make-or-buy decision under asymmetric information," International Journal of Production Economics, Elsevier, vol. 145(1), pages 339-348.
    3. Deligiannis, Michalis & Liberopoulos, George & Benioudakis, Myron, 2023. "Dynamic supplier competition and cooperation for buyer loyalty on service," International Journal of Production Economics, Elsevier, vol. 255(C).
    4. Yingxiao Li & Jianheng Zhou, 2022. "Sustainable Supplier’s Equilibrium Discount Strategy under Random Demand," Sustainability, MDPI, vol. 14(8), pages 1-12, April.
    5. Zhai, Yue & Hua, Guowei & Cheng, Meng & Cheng, T.C.E., 2023. "Production lead-time hedging and order allocation in an MTO supply chain," European Journal of Operational Research, Elsevier, vol. 311(3), pages 887-905.
    6. Ibtissem Ernez-Gahbiche & Khaled Hadjyoussef & Abdelwaheb Dogui & Zied Jemai, 2019. "Decentralized versus cooperative performances in a Nash game between a customer and two suppliers," Flexible Services and Manufacturing Journal, Springer, vol. 31(2), pages 279-307, June.
    7. Hafezalkotob, Ashkan, 2017. "Competition of domestic manufacturer and foreign supplier under sustainable development objectives of government," Applied Mathematics and Computation, Elsevier, vol. 292(C), pages 294-308.
    8. Xu, Hongyan & Liu, Xiaomin & Huang, He, 2023. "Information sharing and order allocation rule in dual-sourcing," Omega, Elsevier, vol. 114(C).
    9. Masih Fadaki & Babak Abbasi & Prem Chhetri, 2022. "Quantum game approach for capacity allocation decisions under strategic reasoning," Computational Management Science, Springer, vol. 19(3), pages 491-512, July.
    10. Mohsen Ahmadian & Ehsan Elahi & Roger Blake, 2022. "The Behavioral Effects of Competition Intensity and Cost Structure on Competing Suppliers: An Experimental Study in the Context of the USA," International Journal of Global Business and Competitiveness, Springer, vol. 17(2), pages 117-129, December.

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