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Sourcing Strategies and Supplier Incentives for Short-Life-Cycle Goods

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  • Eduard Calvo

    (IESE Business School, University of Navarra, 08034 Barcelona, Spain)

  • Victor Martínez-de-Albéniz

    (IESE Business School, University of Navarra, 08034 Barcelona, Spain)

Abstract

Multiple sourcing with quick response has been recognized as a useful tool to manage demand risk for short-life-cycle goods. However, general wisdom has traditionally ignored the effect of these practices on supplier incentives. In this paper we find that, when suppliers make pricing decisions, dual sourcing does not always lead to higher supply chain efficiency or buyer profits as compared to single sourcing. This loss takes place when suppliers commit to prices up front, before any possible forecast change, but not when they delay the price quotes after demand forecasts have been updated. Specifically, with up-front price commitment, dual sourcing leads to inflation of supplier prices because expensive suppliers will still receive part of the business if they are sufficiently quick. Thus, when supplier prices are endogenous, double marginalization may offset the additional buyer profit enabled by higher ordering flexibility. In contrast, with delayed price quotes, a buyer will find dual sourcing beneficial because single sourcing locks it into a monopolistic supplier that extracts most of the available rent. This paper was accepted by Martin Lariviere, operations management.

Suggested Citation

  • Eduard Calvo & Victor Martínez-de-Albéniz, 2016. "Sourcing Strategies and Supplier Incentives for Short-Life-Cycle Goods," Management Science, INFORMS, vol. 62(2), pages 436-455, February.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:2:p:436-455
    DOI: 10.1287/mnsc.2014.2138
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    2. Kanglin Chen & Xin Wang & Baozhuang Niu & Ying‐Ju Chen, 2022. "The impact of tariffs and price premiums of locally manufactured products on global manufacturers' sourcing strategies," Production and Operations Management, Production and Operations Management Society, vol. 31(9), pages 3474-3490, September.
    3. Juzhi Zhang & Tsan‐Ming Choi & T. C. E. Cheng, 2020. "Stochastic production capacity: A bane or a boon for quick response supply chains?," Naval Research Logistics (NRL), John Wiley & Sons, vol. 67(2), pages 126-146, March.
    4. Sodero, Annibal C. & Namin, Aidin & Gauri, Dinesh K. & Bhaskaran, Sreekumar R., 2021. "The strategic drivers of drop-shipping and retail store sales for seasonal products," Journal of Retailing, Elsevier, vol. 97(4), pages 561-581.

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