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Multiple Sourcing and Procurement Process Selection with Bidding Events

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Author Info

  • Tunay I. Tunca

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Qiong Wu

    ()
    (Graduate School of Business, Stanford University, Stanford, California 94305; and BNP Paribas, Hong Kong, China)

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    Abstract

    We examine the procurement process selection problem of a large industrial buyer who employs reverse auctions for awarding procurement contracts. We contrast two classes of commonly used strategies under multiple sourcing; namely, single-stage reverse auctions, and two-stage processes where price-quantity adjustments between the buyer and the suppliers follow a first-stage reverse auction. Deriving bounds of efficiency for these two classes of procurement processes under convex supplier production costs, we present insights on the conditions under which each class is preferable for the buyer. Considering the effect of contracting and processing costs, a single-stage process is likely to be preferable to a two-stage process when the number of bidding suppliers is high, especially when capacity is rigid. A two-stage process with one information transfer in the second stage may be the preferred procurement mode when production is highly scalable, i.e., when the marginal production cost increase with increased production is small. When the number of suppliers is low, the effect of a decrease in production scalability depends on the current scalability level. For high scalability levels, a decrease in production scalability may decrease the efficiency of both single-stage and simple two-stage processes, whereas for low scalability levels, it tends to increase efficiency for both of these process classes. A decrease in production costs makes employing simple processes more attractive when production is highly scalable or when supplier capacity is rigid. For intermediate production scalability, however, a cost decrease may make employing two-stage processes with multiple information transfers in the second round preferable for the buyer.

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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0972
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 55 (2009)
    Issue (Month): 5 (May)
    Pages: 763-780

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    Handle: RePEc:inm:ormnsc:v:55:y:2009:i:5:p:763-780

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    Related research

    Keywords: procurement auctions; supply chain management; contracting; multiple sourcing;

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    Cited by:
    1. Romero Morales, Dolores & Steinberg, Richard, 2014. "Revenue deficiency under second-price auctions in a supply-chain setting," European Journal of Operational Research, Elsevier, vol. 233(1), pages 131-144.
    2. Anton, James J. & Brusco, Sandro & Lopomo, Giuseppe, 2010. "Split-award procurement auctions with uncertain scale economies: Theory and data," Games and Economic Behavior, Elsevier, vol. 69(1), pages 24-41, May.
    3. Yim, Andrew, 2010. "Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing," MPRA Paper 27858, University Library of Munich, Germany.
    4. Gong, Jiong & Li, Jianpei & McAfee, R. Preston, 2012. "Split-award contracts with investment," Journal of Public Economics, Elsevier, vol. 96(1), pages 188-197.
    5. Fu, Ke & Xu, Jiayan & Miao, Zhaowei, 2013. "Newsvendor with multiple options of expediting," European Journal of Operational Research, Elsevier, vol. 226(1), pages 94-99.
    6. Shachat, Jason & Tan, Lijia, 2012. "An experimental investigation of auctions and bargaining in procurement," MPRA Paper 42409, University Library of Munich, Germany.
    7. Liu, Shuren & Liu, Changgeng & Hu, Qiying, 2013. "Optimal procurement strategies by reverse auctions with stochastic demand," Economic Modelling, Elsevier, vol. 35(C), pages 430-435.
    8. Alok Gupta & Stephen Parente & Pallab Sanyal, 2012. "Competitive bidding for health insurance contracts: lessons from the online HMO auctions," International Journal of Health Care Finance and Economics, Springer, vol. 12(4), pages 303-322, December.
    9. repec:wyi:wpaper:002055 is not listed on IDEAS

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