Sourcing under incomplete information and negative capacity-cost correlation

Abstract

We study a sourcing problem where a buyer reserves capacity from a set of suppliers. The suppliers have finite capacity and their unit production cost is a decreasing function of their capacity, implying scale economies. The capacity of each supplier and therefore the cost is his private information. The buyer and other suppliers only know the probability distribution of the supplier’s capacity. The buyer’s demand is random and she has to decide how much capacity to reserve in advance from a subset of suppliers and how much to source from marketplace. In this study we determine the buyer’s optimum reservation quantity and the size of the supply base. We find the presence of such capacity cost correlation leads to supply base reduction.

Keywords:

• sourcing
• procurement
• supplier selection
• supply chain management

Acknowledgements

The authors are grateful to three anonymous referees for their valuable comments and helpful suggestions that improved this paper. Both authors gratefully acknowledge the funding support received from the AIRBUS Group Endowed Chair for Sourcing and Supply Management at Indian Institute of Management Bangalore for this research.