IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v15y2013i1p45-56.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/msom.1120.0395
    Download Restriction: no
    File URL: https://libkey.io/10.1287/msom.1120.0395?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. David Martimort & Lars Stole, 2002. "The Revelation and Delegation Principles in Common Agency Games," Econometrica, Econometric Society, vol. 70(4), pages 1659-1673, July.
    2. Dilip Mookherjee, 2006. "Decentralization, Hierarchies, and Incentives: A Mechanism Design Perspective," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 367-390, June.
    3. Jason Amaral & Corey A. Billington & Andy A. Tsay, 2006. "Safeguarding the Promise of Production Outsourcing," Interfaces, INFORMS, vol. 36(3), pages 220-233, June.
    4. Mahesh Nagarajan & Yehuda Bassok, 2008. "A Bargaining Framework in Supply Chains: The Assembly Problem," Management Science, INFORMS, vol. 54(8), pages 1482-1496, August.
    5. Guo, Pengfei & Song, Jing-Sheng & Wang, Yulan, 2010. "Outsourcing structures and information flow in a three-tier supply chain," International Journal of Production Economics, Elsevier, vol. 128(1), pages 175-187, November.
    6. Ioana Popescu, 2005. "A Semidefinite Programming Approach to Optimal-Moment Bounds for Convex Classes of Distributions," Mathematics of Operations Research, INFORMS, vol. 30(3), pages 632-657, August.
    7. POITEVIN, Michel, 2000. "Innis Lecture: Can the Theory of Incentives Explain Decentralization?," Cahiers de recherche 2000-13, Universite de Montreal, Departement de sciences economiques.
    8. Michel Poitevin, 2000. "Can the theory of incentives explain decentralization?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 33(4), pages 878-906, November.
    9. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    10. Nihat Altintas & Feryal Erhun & Sridhar Tayur, 2008. "Quantity Discounts Under Demand Uncertainty," Management Science, INFORMS, vol. 54(4), pages 777-792, April.
    11. Drew Fudenberg & David K. Levine & Jean Tirole, 1985. "Infinite-Horizon Models of Bargaining with One-Sided Incomplete Information," Levine's Working Paper Archive 1098, David K. Levine.
    12. Nahum Melumad & Dilip Mookherjee & Stefan Reichelstein, 1997. "Contract Complexity, Incentives, and the Value of Delegation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 257-289, June.
    13. Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Xie, Lei & Liu, Yunping & Han, Hongshuai & (Martin) Qiu, Chun, 2023. "Outsourcing or reshoring? A manufacturer's sourcing strategy in the presence of government subsidy," European Journal of Operational Research, Elsevier, vol. 308(1), pages 131-149.
    5. 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.
    6. Karabay, Bilgehan, 2022. "A new dimension in global value chains: Control vs. delegation in input procurement," Journal of International Economics, Elsevier, vol. 137(C).
    7. 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.
    8. Mandal, Prasenjit & Jain, Tarun, 2023. "When do competing retailers benefit from sourcing through an intermediary?," International Journal of Production Economics, Elsevier, vol. 266(C).
    9. Niu, Baozhuang & Mu, Zihao, 2020. "Sustainable efforts, procurement outsourcing, and channel co-opetition in emerging markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 138(C).
    10. Bolandifar, Ehsan & Chen, Zhong, 2020. "Hedging through index-based price contracts in commodity-based supply chains," Omega, Elsevier, vol. 90(C).
    11. Sangho Chae & Thomas Y. Choi & Glenn Hoetker, 2024. "Theorizing the governance of direct and indirect transactions in multi‐tier supply chains," Journal of Supply Chain Management, Institute for Supply Management, vol. 60(2), pages 3-21, April.
    12. 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.
    13. Guoming Lai & Yixuan Liu & Wenqiang Xiao, 2021. "International Taxation and Production Outsourcing," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 402-418, February.
    14. Lusheng Shao & Xiaole Wu & Fuqiang Zhang, 2020. "Sourcing Competition under Cost Uncertainty and Information Asymmetry," Production and Operations Management, Production and Operations Management Society, vol. 29(2), pages 447-461, February.
    15. Yoo, Seung Ho & Choi, Thomas Y. & Kim, DaeSoo, 2021. "Integrating sourcing and financing strategies in multi-tier supply chain management," International Journal of Production Economics, Elsevier, vol. 234(C).
    16. Vishal Agrawal & Nektarios Oraiopoulos, 2020. "The Role of Decision Rights in Codevelopment Initiatives," Manufacturing & Service Operations Management, INFORMS, vol. 22(4), pages 832-849, July.
    17. Bin Hu & Anyan Qi, 2018. "Optimal Procurement Mechanisms for Assembly," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 655-666, October.
    18. Qi Feng & J. George Shanthikumar, 2018. "Supply and Demand Functions in Inventory Models," Operations Research, INFORMS, vol. 66(1), pages 77-91, 1-2.
    19. Ehsan Bolandifar & Tianjun Feng & Fuqiang Zhang, 2018. "Simple Contracts to Assure Supply Under Noncontractible Capacity and Asymmetric Cost Information," Manufacturing & Service Operations Management, INFORMS, vol. 20(2), pages 217-231, May.
    20. Zhang, Li-Hao & Zhang, Yang-Guang & Wang, Shan-Shan, 2022. "Ocean shipping company’s encroachment with outsourcing competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 167(C).
    21. 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).
    22. Yuan, Yichao & Xiao, Tiaojun, 2023. "Revelation mechanism and decoy strategy for a supply chain with consumer's perceived substitutability," Omega, Elsevier, vol. 120(C).
    23. 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.
    24. Niu, Baozhuang & Ruan, Yiyuan & Zeng, Fanzhuo, 2022. "Promoting remanufacturing through subsidy and environment tax: Channel co-opetition, incentive alignment and regulation optimization," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 166(C).
    25. Lingxiu Dong & Puping (Phil) Jiang & Fasheng Xu, 2023. "Impact of Traceability Technology Adoption in Food Supply Chain Networks," Management Science, INFORMS, vol. 69(3), pages 1518-1535, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Timothy Van Zandt, 2008. "The Interplay Between Incentives and Communication Complexity in Mechanism Design," 2008 Meeting Papers 480, Society for Economic Dynamics.
    2. Otto H. Swank & Bauke Visser, 2015. "Learning from Others? Decision Rights, Strategic Communication, and Reputational Concerns," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 109-149, November.
    3. Stefan Ambec & Michel Poitevin, 2016. "Decision-making in organizations: when to delegate and whom to delegate," Review of Economic Design, Springer;Society for Economic Design, vol. 20(2), pages 115-143, June.
    4. Canton, Joan & De Cara, Stéphane & Jayet, Pierre-Alain, 2009. "Agri-environmental schemes: Adverse selection, information structure and delegation," Ecological Economics, Elsevier, vol. 68(7), pages 2114-2121, May.
    5. 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.
    6. Bag, Parimal K. & Wang, Peng, 2021. "Income tax evasion and audits under common and idiosyncratic shocks," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 99-116.
    7. D. Paul Newman & Kirill E. Novoselov, 2009. "Delegation to Encourage Communication of Problems," Journal of Accounting Research, Wiley Blackwell, vol. 47(4), pages 911-942, September.
    8. Theilen Bernd, 2009. "Monitoring Gains and Decentralization," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-26, September.
    9. Jelovac, Izabela & Macho-Stadler, Ines, 2002. "Comparing organizational structures in health services," Journal of Economic Behavior & Organization, Elsevier, vol. 49(4), pages 501-522, December.
    10. Ashwin Kambhampati & Carlos Segura‐Rodriguez, 2022. "The optimal assortativity of teams inside the firm," RAND Journal of Economics, RAND Corporation, vol. 53(3), pages 484-515, September.
    11. Theilen, Bernd, 2009. "Decentralization and the Gains from Monitoring," Working Papers 2072/42863, Universitat Rovira i Virgili, Department of Economics.
    12. Dilip Mookherjee, 2008. "The 2007 Nobel Memorial Prize in Mechanism Design Theory," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 237-260, June.
    13. Sandonis, Joel & Yermukanova, Binur, 2024. "Tax motivated vertical FDI and transfer pricing," Economic Modelling, Elsevier, vol. 139(C).
    14. Dasgupta, Amil & Maug, Ernst, 2022. "Delegation chains," LSE Research Online Documents on Economics 118852, London School of Economics and Political Science, LSE Library.
    15. Fangzheng Zhu & Yuexiang Lu, 2022. "Carbon Emission Reduction Effect of China’s Financial Decentralization," Sustainability, MDPI, vol. 14(22), pages 1-22, November.
    16. Thành Nguyen, 2017. "Technical Note—Local Bargaining and Supply Chain Instability," Operations Research, INFORMS, vol. 65(6), pages 1535-1545, December.
    17. Martimort, David & Semenov, Aggey & Stole, Lars A., 2018. "A complete characterization of equilibria in an intrinsic common agency screening game," Theoretical Economics, Econometric Society, vol. 13(3), September.
    18. Xiang Fang & Kut C. So & Yunzeng Wang, 2008. "Component Procurement Strategies in Decentralized Assemble-to-Order Systems with Time-Dependent Pricing," Management Science, INFORMS, vol. 54(12), pages 1997-2011, December.
    19. Schweizer, Nikolaus & Szech, Nora, 2015. "A quantitative version of Myerson regularity," Working Paper Series in Economics 76, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    20. Fiocco, Raffaele & Scarpa, Carlo, 2011. "The regulation of interdependent markets," SFB 649 Discussion Papers 2011-046, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:15:y:2013:i:1:p:45-56. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.