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Delegation vs. Control of Component Procurement Under Asymmetric Cost Information and Simple Contracts

Author

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  • Enis Kayis

    (Department of Industrial Engineering, Ozyegin University, Istanbul 34794, Turkey)

  • Feryal Erhun

    (Department of Management Science and Engineering, Stanford University, Stanford, California 94305)

  • Erica L. Plambeck

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

A manufacturer must choose whether to delegate component procurement to her tier 1 supplier or control it directly. Because of information asymmetry about suppliers' production costs and the use of simple quantity discount or price-only contracts, either delegation or control can yield substantially higher expected profit for the manufacturer. Delegation tends to outperform control when (1) the manufacturer is uncertain about the tier 1 supplier's cost and believes that it is likely to be high; (2) the manufacturer and the tier 1 supplier know the tier 2 supplier's cost or at least that it will be high; (3) the manufacturer has an alternative to engaging the tier 1 and tier 2 suppliers, such as in-house production; and (4) the firms use price-only contracts as opposed to quantity discount contracts. These results shed light on practices observed in the electronics industry.

Suggested Citation

  • Enis Kayis & Feryal Erhun & Erica L. Plambeck, 2013. "Delegation vs. Control of Component Procurement Under Asymmetric Cost Information and Simple Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 45-56, April.
    • Handle: RePEc:inm:ormsom:v:15:y:2013:i:1:p:45-56
    DOI: 10.1287/msom.1120.0395
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    16. Niu, Baozhuang & Chen, Lei & Zhang, Jie, 2017. "Punishing or subsidizing? Regulation analysis of sustainable fashion procurement strategies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 107(C), pages 81-96.
    17. Deng, Sijing & Xu, Jiayan, 2023. "Manufacturing and procurement outsourcing strategies of competing original equipment manufacturers," European Journal of Operational Research, Elsevier, vol. 308(2), pages 884-896.
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    19. Karamemis, Gulver & Zhang, Jiayuan & Chen, Yuwen, 2023. "Consignment and turnkey sourcing and outsourcing analysis for a three-player supply chain in various power dynamics," European Journal of Operational Research, Elsevier, vol. 311(1), pages 125-138.
    20. Bin Hu & Anyan Qi, 2018. "Optimal Procurement Mechanisms for Assembly," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 655-666, October.
    21. Freeman, Nickolas & Mittenthal, John & Keskin, Burcu & Melouk, Sharif, 2018. "Sourcing strategies for a capacitated firm subject to supply and demand uncertainty," Omega, Elsevier, vol. 77(C), pages 127-142.
    22. Zormpas, Dimitrios, 2020. "Investments under vertical relations and agency conflicts: A real options approach," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 273-287.
    23. Dong, Binwei & Tang, Wansheng & Zhou, Chi & Ren, Yufei, 2021. "Should original equipment manufacturer assist noncompetitive contract manufacturer to expand capacity?," Omega, Elsevier, vol. 103(C).
    24. 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.
    25. Tao Lu & Ying‐Ju Chen & Brian Tomlin & Yimin Wang, 2019. "Selling Co‐Products through a Distributor: The Impact on Product Line Design," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 1010-1032, April.

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