Optimal Procurement Mechanisms for Assembly

This paper investigates mechanisms by which a powerful original equipment manufacturers procures multiple inputs for assembly from suppliers with privately informed costs, either simultaneously or sequentially. The optimal mechanisms always lead to matching purchase quantities of the inputs. Thus, q...

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Bibliographic Details
Published in:Manufacturing & service operations management 2018-09, Vol.20 (4), p.655-666
Main Authors: Hu, Bin, Qi, Anyan
Format: Article
Language:English
Subjects:
Analysis
Assembly-line methods
Contract manufacturing
contracting timing
Contracts
Costs
informed principal
mechanism design
Operations management
Payments
Purchasing
Revenue
screening
Tariffs
two-part tariff
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Summary:This paper investigates mechanisms by which a powerful original equipment manufacturers procures multiple inputs for assembly from suppliers with privately informed costs, either simultaneously or sequentially. The optimal mechanisms always lead to matching purchase quantities of the inputs. Thus, quantity–payment contracts that implement the optimal mechanisms are contingent across suppliers (i.e., each supplier’s contract terms contain other suppliers’ private costs as variables), making the implementation impractical. To address this issue, we propose alternative implementations of the optimal mechanisms by menus of two-part tariff contracts that are noncontingent. In addition, optimal simultaneous and sequential procurement mechanisms for assembly are shown to be revenue-equivalent for all parties despite their different asymmetric information structures. Our findings suggest that procurement managers need not strategize contracting sequences for assembly, but should rather focus on achieving the best pricing with each supplier and coordinating purchase quantities.
ISSN:1523-4614
1526-5498
DOI:10.1287/msom.2017.0672