Optimal Procurement Mechanisms for Assembly

• 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
• ISSN: 1523-4614; 1526-5498
• DOI: 10.1287/msom.2017.0672

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.