Delegation vs. Control of Component Procurement Under Asymmetric Cost Information and Simple Contracts

Enis Kayis (), Feryal Erhun () and Erica L. Plambeck ()
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Enis Kayis: Department of Industrial Engineering, Ozyegin University, Istanbul 34794, Turkey
Feryal Erhun: Department of Management Science and Engineering, Stanford University, Stanford, California 94305
Erica L. Plambeck: Graduate School of Business, Stanford University, Stanford, California 94305

Manufacturing & Service Operations Management, 2013, vol. 15, issue 1, 45-56

Abstract: A manufacturer must choose whether to delegate component procurement to her tier 1 supplier or control it directly. Because of information asymmetry about suppliers' production costs and the use of simple quantity discount or price-only contracts, either delegation or control can yield substantially higher expected profit for the manufacturer. Delegation tends to outperform control when (1) the manufacturer is uncertain about the tier 1 supplier's cost and believes that it is likely to be high; (2) the manufacturer and the tier 1 supplier know the tier 2 supplier's cost or at least that it will be high; (3) the manufacturer has an alternative to engaging the tier 1 and tier 2 suppliers, such as in-house production; and (4) the firms use price-only contracts as opposed to quantity discount contracts. These results shed light on practices observed in the electronics industry.

Keywords: multitier supply chain; delegation; control; asymmetric information; component procurement; contract design; price-only contracts; quantity discount contracts; robust optimization (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (26)

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