Sourcing Strategies and Supplier Incentives for Short-Life-Cycle Goods

Abstract

Multiple sourcing with quick response has been recognized as a useful tool to manage demand risk for short-life-cycle goods. However, general wisdom has traditionally ignored the effect of these practices on supplier incentives. In this paper we find that, when suppliers make pricing decisions, dual sourcing does not always lead to higher supply chain efficiency or buyer profits as compared to single sourcing. This loss takes place when suppliers commit to prices up front, before any possible forecast change, but not when they delay the price quotes after demand forecasts have been updated. Specifically, with up-front price commitment, dual sourcing leads to inflation of supplier prices because expensive suppliers will still receive part of the business if they are sufficiently quick. Thus, when supplier prices are endogenous, double marginalization may offset the additional buyer profit enabled by higher ordering flexibility. In contrast, with delayed price quotes, a buyer will find dual sourcing beneficial because single sourcing locks it into a monopolistic supplier that extracts most of the available rent. This paper was accepted by Martin Lariviere, operations management.

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