Procuring Fast Delivery, Part II: Sole Sourcing with Information Asymmetry
This paper studies, in the context of a queuing model, a buyer that sources
a good or service from an single supplier chosen
from a pool of potential suppliers. The buyer wants to minimize the sum of
her procurement cost, inventory holding cost and backorder penalty cost.
The latter two operating costs depend on the buyer's inventory policy and
the supplier's delivery lead time, and the supplier's lead time depends on
the supplier's capacity. Suppliers maximize their own profit, the buyer's
transfer payment minus the supplier's capacity cost. Each supplier's capacity
cost is private information, but the buyer has an unbiased estimate of their
costs. We consider scenarios with only one potential supplier as well as
scenarios with multiple potential suppliers, in which case competitive bidding
is possible. Although we evaluate the buyer's optimal procurement mechanism
for different scenarios, we provide several alternative strategies. We highlight
one in particular, which we call a late-fee mechanism: the buyer pays the
supplier a fixed unit price and charges the supplier a fixed late fee for
on-order units; if there is only one potential supplier, the buyer picks
the unit price, otherwise, it is set with an auction.
The late-fee mechanism neither minimizes the buyer's total cost nor maximizes
the supply chain's profit, but along either dimension it is near optimal
(generally within 1%). But, due to its simplicity, it should be
implementable in practice, which, in combination with its near optimal
performance, makes the late-fee mechanism quite attractive. In addition,
we find that competitive bidding always significantly reduces the buyer's
total cost.