Using a Dual-Sourcing Option in the Presence of Asymmetric Information About Supplier Reliability: Competition vs. Diversification

Zhibin (Ben) Yang (), Göker Aydın (), Volodymyr Babich () and Damian R. Beil ()
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Zhibin (Ben) Yang: Lundquist College of Business, University of Oregon, Eugene, Oregon 97403
Göker Aydın: Kelley School of Business, Indiana University-Bloomington, Bloomington, Indiana 47405
Volodymyr Babich: McDonough School of Business, Georgetown University, Washington DC 20057
Damian R. Beil: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109

Manufacturing & Service Operations Management, 2012, vol. 14, issue 2, 202-217

Abstract: We study a buyer's strategic use of a dual-sourcing option when facing suppliers possessing private information about their disruption likelihood. We solve for the buyer's optimal procurement contract. We show that the optimal contract can be interpreted as the buyer choosing between diversification and competition benefits. Better information increases diversification benefits and decreases competition benefits. Therefore, with better information the buyer is more inclined to diversify. Moreover, better information may increase or decrease the value of the dual-sourcing option, depending on the buyer's unit revenue: for large revenue, the buyer uses the dual sourcing option for diversification, the benefits of which increase with information; for small revenue, the buyer uses the dual sourcing option for competition, the benefits of which decrease with information. Surprisingly, as the reliability of the entire supply base decreases, the buyer may stop diversifying under asymmetric information (to leverage competition), whereas it would never do so under symmetric information. Finally, we analyze the effect of codependence between supply disruptions. We find that lower codependence leads the buyer to rely less on competition. Because competition keeps the information costs in check, a reduction in supplier codependence increases the buyer's value of information. Therefore, strategic actions to reduce codependence between supplier disruptions should not be seen as a substitute for learning about suppliers' reliabilities.

Keywords: auctions and mechanism design; incentives and contracting; supply chain management (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:14:y:2012:i:2:p:202-217

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