The Strategic Role of Supplier Learning

Long Gao (), Mohammad Ebrahim Nikoofal () and Wei Zhang ()
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Long Gao: School of Business, University of California, Riverside, California 92521
Mohammad Ebrahim Nikoofal: Ted Rogers School of Management, Toronto Metropolitan University, Toronto, Ontario M5B 2K3, Canada
Wei Zhang: School of Management, Zhejiang University, Hangzhou 310058, China

Manufacturing & Service Operations Management, 2024, vol. 26, issue 1, 271-290

Abstract: Problem definition : We study a procurement problem, where the supplier holds superior cost information and can learn to improve efficiency over time. Despite its prevalence, the supply chain literature provides limited guidance on how to manage learning suppliers with evolving private information. Methodology/results : We use mechanism design. We show that supplier learning has both efficiency and agency effects, it can induce countervailing incentives, and the agency effect can overwhelm the efficiency effect. As a result, (i) supplier learning can hurt profits, (ii) information asymmetry can improve efficiency, (iii) production distortion can go upward, and (iv) ignoring the agency effect of learning can mislead contract design and inflict severe losses. Managerial implications : Our results suggest that previous studies may have overlooked the downside of learning and overestimated the harm of information asymmetry. Moreover, our results help explain when and why firms should overproduce output and disclose private information voluntarily. By highlighting the strategic role of supplier learning, this study sharpens our understanding of supply chain management.

Keywords: countervailing incentives; supplier learning; cost reduction; procurement; contracting; supply risk (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:26:y:2024:i:1:p:271-290

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