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Delegation vs. direct sourcing revisited: contract types under correlated supply risks and asymmetric cost information

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  • Jiguang Chen
  • He Xu
  • Pin Zhou

Abstract

As a popular practice in purchasing, an ever-increasing number of upper-tier suppliers are being added in the supply base of the original equipment manufacturer (OEM) and leveraged to reduce supply risk. This new trend increases the OEM's opportunities to directly source from tier-2 suppliers (direct sourcing for better control) in addition to delegating tier-1 suppliers to source on behalf of the OEM itself (delegation). This paper is devoted to comparing these two mechanisms (delegation vs. direct souring) under both asymmetric information on the production costs of tier-2 suppliers and correlated supply disruptions with tier-2 suppliers. When the OEM offers a revenue-sharing term contract or a base-commitment term contract (in which the OEM is required to procure a fixed base quantity in addition to an option of procuring additional units at a pre-specified price) to a tier-1 supplier under delegation, delegation achieves the same profit for the OEM as direct sourcing does. However, under a fixed-quantity term contract, delegation achieves a lower profit for the OEM than direct sourcing does, no matter the CM is subject to the procurement budget constraint or deep pocket. Moreover, we find delegation may lead to a higher profit for the OEM than direct sourcing does if an improved fixed-quantity term contract is used under delegation with a deep-pocket CM.

Suggested Citation

  • Jiguang Chen & He Xu & Pin Zhou, 2020. "Delegation vs. direct sourcing revisited: contract types under correlated supply risks and asymmetric cost information," International Journal of Production Research, Taylor & Francis Journals, vol. 58(22), pages 7005-7022, November.
    • Handle: RePEc:taf:tprsxx:v:58:y:2020:i:22:p:7005-7022
    DOI: 10.1080/00207543.2019.1689307
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    Cited by:

    1. Bai, Qingguo & Chen, Jiguang & Xu, Jianteng, 2023. "Energy conservation investment and supply chain structure under cap-and-trade regulation for a green product," Omega, Elsevier, vol. 119(C).
    2. Miao, Jie & Liu, Aijun & Wang, Ruiyao & Lu, Hui, 2022. "The influence of information asymmetry on the strategic inventory of deteriorating commodity," Omega, Elsevier, vol. 107(C).
    3. Niu, Baozhuang & Chen, Yuyang & Zeng, Fanzhuo, 2023. "One step further for procurement cooperation: Will the industry leader benefit from its competitive manufacturer's joint determination of consumption quality?," European Journal of Operational Research, Elsevier, vol. 311(3), pages 989-1008.

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