Procuring Fast Delivery: Sole Sourcing with Information Asymmetry

This paper studies a queuing model in which a buyer sources a good or service from an single supplier chosen from a pool of suppliers. The buyer seeks to minimize the sum of her procurement and operating cost, the latter of which depends on the supplier's lead time. The selected supplier can regulate his lead time, but faster lead times are costly. Although the buyer selects the supplier to source from (possibly via an auction) and dictates the contractual terms, the buyer's bargaining power is limited by asymmetric information: the buyer only has an estimate of the suppliers' costs while the suppliers know their costs precisely. We identify a procurement mechanism that minimizes the buyer's total cost (procurement plus operating). This mechanism is not simple: it is a numerically derived non-linear menu of contracts. Therefore, we study several simpler mechanisms: e.g., one that charges a late fee and one that specifies a fixed lead time requirement (no menus, no ...

• Type: Journal
• Year: 2006
• Where: MANSCI
• Authors: Gérard P. Cachon, Fuqiang Zhang
• Keywords: Buyer, Lead Time, MANSCI 2006, Procurement