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Strategic dynamic sourcing from competing suppliers with transferable capacity investment
Author(s) -
Li Cuihong,
Debo Laurens G.
Publication year - 2009
Publication title -
naval research logistics (nrl)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.665
H-Index - 68
eISSN - 1520-6750
pISSN - 0894-069X
DOI - 10.1002/nav.20362
Subject(s) - bidding , term (time) , business , investment (military) , microeconomics , industrial organization , product (mathematics) , procurement , economics , marketing , physics , geometry , mathematics , quantum mechanics , politics , political science , law
We study the supplier relationship choice for a buyer that invests in transferable capacity operated by a supplier. With a long‐term relationship, the buyer commits to source from a supplier over a long period of time. With a short‐term relationship, the buyer leaves open the option of switching to a new supplier in the future. The buyer has incomplete information about a supplies efficiency, and thus uses auctions to select suppliers and determine the contracts. In addition, the buyer faces uncertain demand for the product. A long‐term relationship may be beneficial for the buyer because it motivates more aggressive bidding at the beginning, resulting a lower initial price. A short‐term relationship may be advantageous because it allows switching, with capacity transfer at some cost, to a more efficient supplier in the future. We find that there exists a critical level of the switching cost above which a long‐term relationship is better for the buyer than a short‐term relationship. In addition, this critical switching cost decreases with demand uncertainty, implying a long‐term relationship is more favorable for a buyer facing volatile demand. Finally, we find that in a long‐term relationship, capacity can be either higher or lower than in a short‐term relationship. © 2009 Wiley Periodicals, Inc. Naval Research Logistics 2009