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Outsourcing through competition: What is the best competition parameter?

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  • Elahi, Ehsan
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    Abstract

    In this paper we consider a single buyer who wants to outsource the manufacturing of a product to N potential suppliers. The buyer's objective is to maximize the service level she receives from the suppliers. The suppliers compete for the buyer's demand based on a competition parameter which the buyer announces along with an allocation rule. We model each supplier as a make-to-stock queueing system. Using a simple proportional allocation function, we compare two competition parameters: service level and inventory level. We show that inventory competition creates a higher overall service level for the buyer. We also show an optimal form of competition parameter which can induce the maximum feasible service level. Our base model shows the results for the competition between identical suppliers. We then extend the results to a case where the suppliers are heterogeneous.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0925527313001096
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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Production Economics.

    Volume (Year): 144 (2013)
    Issue (Month): 1 ()
    Pages: 370-382

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    Handle: RePEc:eee:proeco:v:144:y:2013:i:1:p:370-382

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    Web page: http://www.elsevier.com/locate/ijpe

    Related research

    Keywords: Outsourcing; Inventory competition; Service competition; Optimal mechanism;

    References

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    1. Yunzeng Wang & Yigal Gerchak, 2001. "Supply Chain Coordination when Demand Is Shelf-Space Dependent," Manufacturing & Service Operations Management, INFORMS, vol. 3(1), pages 82-87, August.
    2. Kut C. So, 2000. "Price and Time Competition for Service Delivery," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 392-409, April.
    3. Armony, Mor & Haviv, Moshe, 2003. "Price and delay competition between two service providers," European Journal of Operational Research, Elsevier, vol. 147(1), pages 32-50, May.
    4. Lode Li & Yew Sing Lee, 1994. "Pricing and Delivery-Time Performance in a Competitive Environment," Management Science, INFORMS, vol. 40(5), pages 633-646, May.
    5. Wu, Cheng-Han, 2012. "Price and service competition between new and remanufactured products in a two-echelon supply chain," International Journal of Production Economics, Elsevier, vol. 140(1), pages 496-507.
    6. Joseph Hall & Evan Porteus, 2000. "Customer Service Competition in Capacitated Systems," Manufacturing & Service Operations Management, INFORMS, vol. 2(2), pages 144-165, November.
    7. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
    8. Albert Y. Ha & Lode Li & Shu-Ming Ng, 2003. "Price and Delivery Logistics Competition in a Supply Chain," Management Science, INFORMS, vol. 49(9), pages 1139-1153, September.
    9. Xiao, Tiaojun & Yang, Danqin, 2008. "Price and service competition of supply chains with risk-averse retailers under demand uncertainty," International Journal of Production Economics, Elsevier, vol. 114(1), pages 187-200, July.
    10. Colin E. Bell & Shaler Stidham, Jr., 1983. "Individual versus Social Optimization in the Allocation of Customers to Alternative Servers," Management Science, INFORMS, vol. 29(7), pages 831-839, July.
    11. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, vol. 53(2), pages 241-259, February.
    12. GĂ©rard P. Cachon & Fuqiang Zhang, 2007. "Obtaining Fast Service in a Queueing System via Performance-Based Allocation of Demand," Management Science, INFORMS, vol. 53(3), pages 408-420, March.
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    Cited by:
    1. Xu, Su Xiu & Lu, Qiang & Huang, George Q. & Zhang, Ting, 2013. "Scope economies, market information, and make-or-buy decision under asymmetric information," International Journal of Production Economics, Elsevier, vol. 145(1), pages 339-348.

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