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Split-Award Auctions for Supplier Retention

Author

Listed:
  • Aadhaar Chaturvedi

    (Department of Business Administration, University of Namur, B-5000 Namur, Belgium)

  • Damian R. Beil

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Victor Martínez-de-Albéniz

    (IESE Business School, University of Navarra, 08034 Barcelona, Spain)

Abstract

To stay abreast of current supply-market pricing, it is common for procurement managers to frequently organize auctions among a pool of qualified suppliers (the supply base ). Sole awards can alienate losing suppliers and cause them to defect from the supply base. To maintain the supply base and thereby control the high costs of finding and qualifying new suppliers, buyers often employ split awards, which in turn inflate purchase costs. This results in a trade-off that we investigate in an infinite-horizon stationary setting in which the relative cost position of each supplier is randomly drawn in every period. We characterize the optimal split award that minimizes long-run costs (purchasing and qualification) and show that maintaining a constant supply-base size---using a “qualify-up-to” policy---is optimal for the buyer. We find that neither the extent of multisourcing nor the buyer's value of split awards compared with winner-take-all auctions are monotonic in the qualification cost and that split-award auctions can increase ex ante system, buyer, and supplier benefits simultaneously. To our knowledge, this is the first paper studying split-award auctions for supply-base maintenance, and it will hopefully galvanize further research on this important topic. This paper was accepted by Yossi Aviv, operations management.

Suggested Citation

  • Aadhaar Chaturvedi & Damian R. Beil & Victor Martínez-de-Albéniz, 2014. "Split-Award Auctions for Supplier Retention," Management Science, INFORMS, vol. 60(7), pages 1719-1737, July.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:7:p:1719-1737
    DOI: 10.1287/mnsc.2013.1835
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    Cited by:

    1. Wei Chen & Milind Dawande & Ganesh Janakiraman, 2018. "Optimal Procurement Auctions Under Multistage Supplier Qualification," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 566-582, July.
    2. Jain, Tarun & Hazra, Jishnu & Cheng, T.C.E., 2018. "Sourcing under overconfident buyer and suppliers," International Journal of Production Economics, Elsevier, vol. 206(C), pages 93-109.
    3. Chai, Junyi & Ngai, Eric W.T., 2015. "Multi-perspective strategic supplier selection in uncertain environments," International Journal of Production Economics, Elsevier, vol. 166(C), pages 215-225.
    4. Chaturvedi, Aadhaar, 2015. "Procurement auctions with capacity constrained suppliers," European Journal of Operational Research, Elsevier, vol. 247(3), pages 987-995.
    5. Yan Chen & Peter Cramton & John A. List & Axel Ockenfels, 2021. "Market Design, Human Behavior, and Management," Management Science, INFORMS, vol. 67(9), pages 5317-5348, September.
    6. Aadhaar Chaturvedi & Elena Katok & Damian R. Beil, 2019. "Split-Award Auctions: Insights from Theory and Experiments," Management Science, INFORMS, vol. 65(1), pages 71-89, January.
    7. Cuihong Li, 2020. "Supplier Competition and Cost Reduction with Endogenous Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 996-1010, September.
    8. Bin Hu & Anyan Qi, 2018. "Optimal Procurement Mechanisms for Assembly," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 655-666, October.
    9. Alan Gelder & Dan Kovenock & Brian Roberson, 2022. "All-pay auctions with ties," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(4), pages 1183-1231, November.
    10. Aadhaar Chaturvedi, 2021. "Excessive Competition and Supplier Non‐Performance Risk: Trade‐offs in Reverse Auctions," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 3073-3093, September.
    11. Fugger, Nicolas & Gretschko, Vitali & Pollrich, Martin, 2019. "Sequential procurement with limited commitment," ZEW Discussion Papers 19-030, ZEW - Leibniz Centre for European Economic Research.
    12. Merckx, Gilles & Chaturvedi, Aadhaar, 2020. "Short vs. long-term procurement contracts when supplier can invest in cost reduction," International Journal of Production Economics, Elsevier, vol. 227(C).
    13. Arozamena, Leandro & Weinschelbaum, Federico & Wolfstetter, Elmar G., 2018. "Procuring substitutes with (fine-tuned) first-price auctions," Economics Letters, Elsevier, vol. 171(C), pages 115-118.
    14. Cuihong Li & Zhixi Wan, 2017. "Supplier Competition and Cost Improvement," Management Science, INFORMS, vol. 63(8), pages 2460-2477, August.

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