Sole Sourcing Research Articles

Horizontal outsourcing and price competition: The role of sole sourcing commitment

Previous studies on horizontal outsourcing between competing duopolists emphasize cost factors, such as economies of scale and/or variable cost advantages in Cournot markets, as potential explanations. Our paper studies horizontal outsourcing when two competing firms engage in Bertrand competition, and highlights the important role of sole sourcing commitment. We adopt the framework of a multistage duopoly game that comprises of an incumbent and an entrant. The incumbent has the capability to make a key component in‐house, and the entrant, who is a rival of the incumbent in the downstream market, can source the component from either the incumbent or a supplier not participating in the end‐product market. We find that if the entrant commits to sole sourcing, horizontal outsourcing can occur when the incumbent has a component cost advantage or even a small cost disadvantage over the alternative supplier. Specifically, if the component cost gap is small, horizontal outsourcing may soften downstream market competition and benefit both firms at the expense of inducing higher prices for the consumers. If the incumbent has a significant cost advantage, horizontal outsourcing may lead to an increased downstream price war by expanding the total supply of end products. Without sole sourcing commitment, horizontal outsourcing occurs only when the incumbent has a cost advantage, and it always strengthens downstream price competition. By contrast, if the firms engage in downstream Cournot competition, sole sourcing commitment has no impact on the adoption of horizontal outsourcing, and the entrant sources from her rival only when the incumbent enjoys a significant cost advantage. Finally, we also study various extensions to check and confirm the robustness of our main results to key model assumptions.

Pulled in opposite directions: A joint consideration of supply and demand uncertainty in supply chain decision‐making

AbstractSupply chain inventory management decisions are complicated by the presence of both downstream (demand) and upstream (supply) uncertainties. Prior research shows that each type of uncertainty leads to specific decision biases. Demand uncertainty induces a pull‐to‐center bias, wherein orders are drawn away from the optimal ordering decision in the direction of expected demand. Supply uncertainty elicits a diversification bias, wherein inventory managers tend to source from multiple suppliers, even when sole sourcing is optimal. Our research employs a controlled laboratory experiment to study these biases when both types of uncertainty—that is, supply and demand uncertainty—are present. Our results show that the presence of both supply and demand uncertainty has a more nuanced effect on decision biases than does either type of uncertainty alone. Demand uncertainty can elicit and influence the diversification bias, even in the absence of supply uncertainty. Moreover, supply uncertainty affects the magnitude of the pull‐to‐center bias. Our work reveals the need for further attention from supply chain academics and managers on how supply and demand uncertainty jointly affect inventory managers’ decisions.

A research agenda to reflect reality: On being responsive

A research agenda to reflect reality: On being responsive

Seismic response of precast bridge columns with composite non-proprietary UHPC filled ducts ABC connections

Accelerated bridge construction (ABC) utilizes advanced planning, new construction techniques and innovative detailing to expedite construction of new bridges or rehabilitation and replacement of old deteriorated bridges. ABC has been widely used in low seismic regions and mostly implemented in the superstructure elements but much less considered for substructure elements such as column-base connections, especially in moderate and high seismic regions. While robust seismic ABC connections have been developed using ultra-high performance concrete (UHPC), sole sourcing of robust commercial UHPC mixes is causing bidding issues and limiting the wide adoption of such seismic ABC connections. Thus, validating alternative solutions that use non-proprietary materials could help overcome such challenges. This paper presents experimental and analytical investigation of the structural and seismic behavior of precast bridge columns with non-proprietary UHPC-filled ducts column-to-footing connections. For this study, a recently developed non-proprietary UHPC mix at the University of Nevada, Reno (UNR) is used. Two large-scale column models, varied only in reinforcement debonding, were tested at UNR under combined axial and cyclic lateral loading to evaluate their seismic performance. The column models were compared with reference cast-in-place column models and another column model incorporating proprietary commercial UHPC-filled duct connection from previous studies. The test results showed that the column models were emulative of conventional connections. Analytical modeling for the two tested columns was also conducted and shown to successfully reproduce the local and global behaviors of column models with acceptable accuracy when bond-slip and bar debonding effects are properly considered.

Strategic partial outsourcing in the presence of single-source components

We study the sourcing decision of a manufacturer in choosing between sole sourcing and multi-sourcing for a production component, when available sources are under different efficiency levels. In our model, the manufacturer can either produce the component in-house, or outsource to less efficient external suppliers. Without any demand uncertainty or ex-ante capacity constraint with in-house production, we find that the manufacturer may establish only limited in-house production capacity and eventually outsource to less efficient external suppliers. Such partial outsourcing is purely strategic and is due to the existence of single-source components, with which the manufacturer solely relies on key suppliers who possess great market power. Partial outsourcing enables the manufacturer to mitigate the pricing power of key suppliers, which is optimal to the manufacturer so long as the associated efficiency loss of outsourcing is not too pronounced. Moreover, cost increase in outsourcing may lead the manufacturer to outsource even more in order to boost its profitability.

Strategic sourcing in forward and spot markets with reliable and unreliable suppliers

We study sourcing and purchasing strategies of a monopolistic retailer in a market with a reliable but expensive supplier and an unreliable but cheap supplier with random yield. The retailer can solely source from either supplier or adopt dual sourcing in the forward market while engaging in spot trade. Our study shows that the retailer's relative reliance on forward sourcing is lessened in the presence of a reliable supplier with higher cost, an unreliable supplier with more variable yield, and a more sensitive spot market. Moreover, highly variable forward supply enhances the value of a spot market when compared with high forward cost. Regarding the forward sourcing decision, we find that dual sourcing always benefits the retailer as well as the whole society, whereas upstream competition is not definitely harmful to suppliers. Dual sourcing might benefit the reliable supplier when its cost is sufficiently low or the unreliable supplier when its yield variability is sufficiently small. Besides, dual sourcing could degrade into unreliable sole sourcing when the reliable supplier is relatively expensive. Moreover, in spite of the competition between suppliers in the forward market, dual sourcing does not definitely increase the retailer's reliance on forward sourcing relative to spot trade.

Horizontal Outsourcing and Price Competition: The Role of Sole Sourcing Commitment

Previous studies on horizontal outsourcing between competing duopolists emphasize cost factors such as economies of scale and/or variable cost advantages in Cournot markets as potential explanations. This paper studies horizontal outsourcing when two competing firms engage in Bertrand competition, and highlights the important role of sole sourcing commitment. We adopt the framework of a duopolistic multi-stage game that comprises of an incumbent and an entrant. The incumbent has the technology know-how to make a key component in-house, and the entrant, who is a rival of the incumbent in the downstream market, can source the component either from the incumbent or from a supplier that does not participate in the end product market. We find that if the entrant commits to sole sourcing, horizontal outsourcing can occur when the incumbent has a component cost advantage or even a small cost disadvantage over the alternative supplier. Specifically, if the component cost gap is small, horizontal outsourcing may soften downstream market competition and benefit both firms at the expense of inducing higher prices for the consumers. If the incumbent has a significant cost advantage, horizontal outsourcing may lead to increased downstream price competition by expanding the total supply of end products. Without sole sourcing commitment, horizontal outsourcing occurs only if the incumbent has a cost advantage, and it always strengthens downstream price competition and benefits the consumers. In contrast, when the firms engage in downstream Cournot competition, sole sourcing commitment has no impact on the adoption of horizontal outsourcing, and the entrant sources from her rival only when the incumbent enjoys a significant component cost advantage. Finally, we also study various model extensions to confirm the robustness of our main results to key model assumptions.

A Responsive Pricing Grid Operator Sourcing from Competing Generators under Uncertain Supply and Demand

Electricity supply chains involve more sources of uncertainty than typical production and manufacturing supply chains, owing to the intermittent nature of renewable energy generation. Therefore, it is critical but challenging to mitigate supply disruption risks by improving management methods. The extant literature has mainly investigated the sourcing strategies of manufacturers with price-taking suppliers. Where there is an option to source from multiple generators, including regular but unreliable generators and reliable backup generators, a flexible sourcing strategy is usually regarded as the best tactic for the grid operator. Our objective is to evaluate the costs and benefits of flexible sourcing and sole sourcing when generators are strategic price-setters. In this paper, we develop a Stackelberg game with wholesale prices contingent on the dominant grid operator’s sourcing strategy. We describe and analyze the resulting equilibriums under different scenarios. The results show that the grid operator does not necessarily benefit from a backup generator and that the flexible sourcing mode is not in fact optimal, except when the disruption ratio of the unreliable generator is medium and the penalty-sharing ratio of the unreliable generator is low. The model is applied to a numerical case study of a real-word electricity supply chain to illustrate the validity and effectiveness of the proposed conclusions.

Dual sourcing with price discovery

We consider a (standard) reverse auction for dual sourcing and propose to determine both the providers' shares and the reserve price endogenously, depending on the suppliers' bids. Our benchmark considers a two-stage game of complete information. After a first round of bidding, the two most competitive suppliers advance to the second stage and compete again with a refined reserve price, which is based on the lowest price of the excluded providers. We show that at the first stage providers reveal their costs truthfully. At the second stage suppliers balance a trade-off between increasing their share and raising their mark up. Surprisingly, when discarded suppliers are competitive enough, the procedure not only allows taking advantage of dual sourcing but also generates lower procurement expenditures than a standard auction for sole sourcing. We also consider extensions of the benchmark model, including to situations in which providers have private information about their costs.

Shortages of benzathine penicillin for prevention of mother-to-child transmission of syphilis: An evaluation from multi-country surveys and stakeholder interviews.

BackgroundBenzathine penicillin G (BPG) is the only recommended treatment to prevent mother-to-child transmission of syphilis. Due to recent reports of country-level shortages of BPG, an evaluation was undertaken to quantify countries that have experienced shortages in the past 2 years and to describe factors contributing to these shortages.Methods and findingsCountry-level data about BPG shortages were collected using 3 survey approaches. First, a survey designed by the WHO Department of Reproductive Health and Research was distributed to 41 countries and territories in the Americas and 41 more in Africa. Second, WHO conducted an email survey of 28 US Centers for Disease Control and Prevention country directors. An additional 13 countries were in contact with WHO for related congenital syphilis prevention activities and also reported on BPG shortages. Third, the Clinton Health Access Initiative (CHAI) collected data from 14 countries (where it has active operations) to understand the extent of stock-outs, in-country purchasing, usage behavior, and breadth of available purchasing options to identify stock-outs worldwide. CHAI also conducted in-person interviews in the same 14 countries to understand the extent of stock-outs, in-country purchasing and usage behavior, and available purchasing options. CHAI also completed a desk review of 10 additional high-income countries, which were also included. BPG shortages were attributable to shortfalls in supply, demand, and procurement in the countries assessed. This assessment should not be considered globally representative as countries not surveyed may also have experienced BPG shortages. Country contacts may not have been aware of BPG shortages when surveyed or may have underreported medication substitutions due to desirability bias. Funding for the purchase of BPG by countries was not evaluated. In all, 114 countries and territories were approached to provide information on BPG shortages occurring during 2014–2016. Of unique countries and territories, 95 (83%) responded or had information evaluable from public records. Of these 95 countries and territories, 39 (41%) reported a BPG shortage, and 56 (59%) reported no BPG shortage; 10 (12%) countries with and without BPG shortages reported use of antibiotic alternatives to BPG for treatment of maternal syphilis. Market exits, inflexible production cycles, and minimum order quantities affect BPG supply. On the demand side, inaccurate forecasts and sole sourcing lead to under-procurement. Clinicians may also incorrectly prescribe BPG substitutes due to misperceptions of quality or of the likelihood of adverse outcomes.ConclusionsTargets for improvement include drug forecasting and procurement, and addressing provider reluctance to use BPG. Opportunities to improve global supply, demand, and use of BPG should be prioritized alongside congenital syphilis elimination efforts.

Corrupt Practices in the Construction Industry: Survey of Ghanaian Experience

Across the globe, corruption presents a major risk that reduces construction project performances by inflating costs and reducing the quality of the infrastructure commissioned. In developing countries, corruption stifles economic development and engenders social inequality. Using a structured questionnaire survey to elicit direct knowledge and lived experiences of construction practitioners, this study uncovered the prevalence and forms of corrupt practices within the developing country of Ghana. Research findings illustrate that habitual corruption and unethical behavior prevail among public officials, contractors, and construction professionals during the bid evaluation, tendering, and contract implementation stages of a construction contract. This research proffers that corruption is driven by a toxic concoction of high political connections, excessive and reckless sole sourcing of public construction projects, lack of commitment by construction companies in addressing corruption, and the inherently idiosyncratic operational environment of the construction sector. The top five forms of corruption frequently encountered, in descending order, are kickbacks (extortion), bribery, collusion and tender rigging, conflict of interest, and fraud. This research presents a rare glimpse of construction industry corruption in a developing country and provides polemic clarity geared to intellectually challenge readers in government and industry. Future work is required to explore and develop appropriate countermeasures to address corrupt practices and behaviors.

Strategic Behavior of Suppliers in the Face of Production Disruptions

To mitigate supply disruption risks, some manufacturers consider a flexible sourcing strategy, where they have an option of sourcing from multiple suppliers, including regular unreliable suppliers and backup reliable ones. Our objective is to evaluate the costs and benefits associated with flexible sourcing when suppliers are strategic price setters. We show that when each supplier announces a single (wholesale) price, such a game leads to a conflict of incentives and is not realistic in most practical settings. Therefore, we focus on a contingent-pricing game, with wholesale prices contingent on the manufacturer’s sourcing strategy. We describe the resulting equilibrium outcomes corresponding to the manufacturer’s different sourcing and inventory strategies. We show that in equilibrium, inventories are carried either by the manufacturer or by the unreliable supplier, but not both. The manufacturer does not necessarily benefit from the existence of a backup supplier and, in fact, is typically worse off. Similarly, supply chain performance may degrade. Thus, an up-front commitment to sole sourcing may be beneficial. Interestingly, suppliers may benefit from flexible sourcing even though the manufacturer does not. The main results extend to cases when partial backup sourcing is allowed, both suppliers are unreliable, recovery times are non-memoryless, an unreliable supplier may provide a richer set of contingent prices, or the supplier may be risk averse. The online supplementary document is available at https://doi.org/10.1287/mnsc.2016.2626 . This paper was accepted by Yossi Aviv, operations management.

A longitudinal outlook of violations of Ghana's Public Procurement Law, Act (663) 2003

This study sought to ascertain the degree and nature of violations of Ghana's Public Procurement Act (Act 663) 2003 as captured in the Auditors-General's reports after a decade of its implementation. This longitudinally exploratory study relied on secondary data - data extracted from the Auditors-General's reports spanning 2004 to 2013. It was then analysed using MS Excel. The study revealed that uncompetitive tendering, sole sourcing without the approval of the appropriate Tender Review Boards constituted the most violated sections of the law respectively. Another important finding was that the Ministries of Education, Health and Local Government and Rural Development were the three top violators of the law over the period.

Parametric time overrun estimation of building projects

Purpose Time overruns are commonplace within the construction industry. These result in deception because project managers critically assess the economic and financial viability of a project before implementation. Forecasting the likelihood of time overruns will not only lead to a reconsideration on the decision to build but also help put in place the necessary control measures – exactly what this research achieved. Design/methodology/approach The paper argues that rather than depending on the critical failure factors that are unknown at the pre-contract stage to forecast the likelihood of occurrence, it will be more useful to rely on project attributes that are known before contract signing. A multiple linear regression analysis is used for the model development based on ten independent variables. Findings About 86.6 per cent of all the projects experienced time overruns. The mean time overrun is 106.5 per cent. Initial contract sum, initial duration, gross floor area, contractor class D2K2, competitive tendering, sole sourcing and single-storey buildings explained about 44.7 per cent of the variations within time overruns, with a mean absolute percentage error of 60.7 per cent. Research limitations/implications The predictive accuracy of the model can, in practice, be tested after the completion of a project by comparing the actual project schedule with the planned schedule. Any disparity in the expected outputs should result in a reassessment of the significant independent variables to improve the forecasting abilities of the model. Practical implications The model is expected to be very useful at the pre-contract stage when detailed designs are unavailable. As a decision support system, it will help the practitioners and decision-makers make informed decisions while minimizing the time and resources spent to arrive at these decisions. Originality/value This research presents a unique opportunity to forecast the likelihood of time overruns within the building sector based on project attributes that are known before the contract-signing phase.

불확실한 수율하에서 단일소싱의 최적성

Though the supplier diversification is considered as a vital tool to mitigate the risk due to supply chain disruptions, there are results which show the optimality of the sole sourcing. This paper further generalizes the results to show that the sole sourcing is optimal under very mild conditions. Discussion on why the sole sourcing is optimal is given with the insight on the value of supplier diversification.

Managing Disruptions in Decentralized Supply Chains with Endogenous Supply Process Reliability

Supply disruptions are all too common in supply chains. To mitigate delivery risk, buyers may either source from multiple suppliers or offer incentives to their preferred supplier to improve its process reliability. These incentives can be either direct (investment subsidy) or indirect (inflated order quantity). In this study, we present a series of models to highlight buyers’ and suppliers’ optimal parameter choices. Our base‐case model has deterministic buyer demand and two possibilities for the supplier yield outcomes: all‐or‐nothing supply or partial disruption. For the all‐or‐nothing model, we show that the buyer prefers to only use the subsidy option, which obviates the need to inflate order quantity. However, in the partial disruption model, both incentives—subsidy and order inflation—may be used at the same time. Although single sourcing provides greater indirect incentive to the selected supplier because that avoids order splitting, we show that the buyer may prefer the diversification strategy under certain circumstances. We also quantify the amount by which the wholesale price needs to be discounted (if at all) to ensure that dual sourcing strategy dominates sole sourcing. Finally, we extend the model to the case of stochastic demand. Structural properties of ordering/subsidy decisions are derived for the all‐or‐nothing model, and in contrast to the deterministic demand case, we establish that the buyer may increase use of subsidy and order quantity at the same time.

A note on supplier diversification under random yield

Fadıloğlu et al. and Tajbakhsh et al. consider supplier diversification in an EOQ type inventory setting with multiple suppliers and binomial yield and show that working with a single supplier is always optimal. In this short note, we present an alternative and more elegant proof of the optimality of sole sourcing in the EOQ model with general random yield.

Horizontal Capacity Coordination for Risk Management and Flexibility: Pay Ex Ante or Commit a Fraction of Ex Post Demand?

Motivated by the dual-sourcing and contracting practices in the semiconductor industry, we study two prevailing types of contracts that deal with horizontal-capacity-coordination issues between two possible sources: an integrated device manufacturer (IDM) and a foundry. IDMs both design and manufacture semiconductor devices, whereas foundries concentrate only on manufacturing. Because production capacity is capital intensive, IDMs often make decisions on whether to manufacture each device internally or subcontract to foundries. Two types of contracts are most frequently used in such settings. Under α-contracts, a fixed fraction α of ex post realized demand is committed to subcontract to the foundry and serves as an incentive for the foundry to build capacity. Under reservation contracts, an ex ante capacity reservation fee is paid to the foundry as an incentive to build capacity. Because of the different nature of incentives under these contracts, it is unclear which type of contract maximizes the IDM's expected profit. Furthermore, IDMs and their customers often prefer dual sourcing to sole sourcing for risk-management purposes. This paper studies the relationship between the two types of contracts, both with and without dual-sourcing constraints and shows the effect of a dual-sourcing preference on contract selection. Our analysis offers supporting rationale for the coexistence of α-contracts and reservation contracts in practice and provides insights on horizontal capacity coordination beyond the semiconductor industry.

Management Insights

Management Insights

Sourcing for Supplier Effort and Competition: Design of the Supply Base and Pricing Mechanism

We study a buyer's sourcing strategy along two dimensions: the supply base design and the pricing mechanism, considering supplier competition and cost-reduction effort. The supply base design concerns the number of suppliers (one or two) included in the supply base and the capacity to be invested in each supplier. The pricing mechanism determines the timing of the price decisions, with the buyer making price commitments before suppliers exert cost-reduction efforts that may be renegotiated afterward. We find that symmetric capacity investment in suppliers and low price commitments (more likely to be renegotiated) are effective at fostering supplier competition, whereas asymmetric investment and high price commitments (less likely to be renegotiated) are better at motivating supplier effort. A complementary relationship exists between the supply base design and pricing mechanism: A more symmetric supply base should be combined with lower price commitments, leading to more renegotiation opportunities. This results in three possible sourcing structures: sole sourcing (investing capacity in a single supplier and forming price with ex ante commitments), symmetric dual sourcing (investing equal capacity in both suppliers and forming price with ex post negotiations), and asymmetric dual sourcing (investing positive but unequal capacities in two (ex ante identical) suppliers and forming price using both ex ante commitments and ex post (re)negotiations). We characterize the conditions for each structure and identify a strategic role of capacity investment.This paper was accepted by Martin Lariviere, operations management.