Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing
AbstractThe advantage of multiple sourcing to protect against supplier failures arising from undependable (or even unsafe) products due to latent defects is examined using a quality-cost model of supply base composition. Prior models have focused on supplier failures arising from unreliable supply, such as late/ insufficient/ no delivery, due to random yields. This model focuses on non-linear external failure costs leading to a desire for risk diversification. I derive a closed-form characterization of the optimal production quota allocation, which determines the optimal supply base with two intuitive properties. If a supplier is selected, any supplier of higher quality must also be selected. Moreover, larger production quotas should be assigned to higher-quality suppliers. These properties hold under a mild condition on the differences among suppliers’ production costs. The condition includes the special case of equal costs but also allows unequal costs without any particular order (e.g, higher-quality suppliers may or may not have higher production costs). I also derive a necessary and sufficient condition for determining the exact size of the optimal supply base, provided the mild condition holds. An alternative necessary and sufficient condition is derived to determine whether single or multiple sourcing is optimal, without requiring any precondition.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 27858.
Date of creation: 18 Jun 2010
Date of revision:
Supplier selection; supply base composition; latent defects; multiple sourcing; single sourcing; total cost of purchasing.;
Find related papers by JEL classification:
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- M11 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Production Management
- L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zeger Degraeve & Filip Roodhooft, 2000. "A Mathematical Programming Approach for Procurement Using Activity Based Costing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(1&2), pages 69-98.
- Kashi R. Balachandran & Suresh Radhakrishnan, 2005. "Quality Implications of Warranties in a Supply Chain," Management Science, INFORMS, vol. 51(8), pages 1266-1277, August.
- Tunay I. Tunca & Qiong Wu, 2009. "Multiple Sourcing and Procurement Process Selection with Bidding Events," Management Science, INFORMS, vol. 55(5), pages 763-780, May.
- Gary H. Chao & Seyed M. R. Iravani & R. Canan Savaskan, 2009. "Quality Improvement Incentives and Product Recall Cost Sharing Contracts," Management Science, INFORMS, vol. 55(7), pages 1122-1138, July.
- Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992.
"Regulation by Duopoly,"
IDEI Working Papers
20, Institut d'Économie Industrielle (IDEI), Toulouse.
- McGuire, Thomas G. & Riordan, Michael H., 1995.
"Incomplete information and optimal market structure public purchases from private providers,"
Journal of Public Economics,
Elsevier, vol. 56(1), pages 125-141, January.
- Thomas G. McGuire & Michael H. Riordan, 1991. "Incomplete Information and Optimal Market Structure: Public Purchases from Private Providers," Papers 0010, Boston University - Industry Studies Programme.
- Iny Hwang & Suresh Radhakrishnan & Lixin (Nancy) Su, 2006. "Vendor Certification and Appraisal: Implications for Supplier Quality," Management Science, INFORMS, vol. 52(10), pages 1472-1482, October.
- Cremer, Jacques, 1995. "Towards an economic theory of incentives in just-in-time manufacturing," European Economic Review, Elsevier, vol. 39(3-4), pages 432-439, April.
- Weber, Charles A. & Current, John R. & Benton, W. C., 1991. "Vendor selection criteria and methods," European Journal of Operational Research, Elsevier, vol. 50(1), pages 2-18, January.
- Volodymyr Babich & Apostolos N. Burnetas & Peter H. Ritchken, 2007. "Competition and Diversification Effects in Supply Chains with Supplier Default Risk," Manufacturing & Service Operations Management, INFORMS, vol. 9(2), pages 123-146, October.
- Ruiz-Torres, Alex J. & Mahmoodi, Farzad, 2006. "A supplier allocation model considering delivery failure, maintenance and supplier cycle costs," International Journal of Production Economics, Elsevier, vol. 103(2), pages 755-766, October.
- Maqbool Dada & Nicholas C. Petruzzi & Leroy B. Schwarz, 2007. "A Newsvendor's Procurement Problem when Suppliers Are Unreliable," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 9-32, August.
- Laffont, Jean-Jacques & Tirole, Jean, 1987.
"Auctioning Incentive Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 95(5), pages 921-37, October.
- Dasgupta, Sudipto & Spulber, Daniel F., 1989. "Managing procurement auctions," Information Economics and Policy, Elsevier, vol. 4(1), pages 5-29.
- Berger, Paul D. & Gerstenfeld, Arthur & Zeng, Amy Z., 2004. "How many suppliers are best? A decision-analysis approach," Omega, Elsevier, vol. 32(1), pages 9-15, February.
- Riordan, Michael H, 1996. "Contracting with Qualified Suppliers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 115-28, February.
- Wruck, Karen Hopper & Jensen, Michael C., 1994. "Science, specific knowledge, and total quality management," Journal of Accounting and Economics, Elsevier, vol. 18(3), pages 247-287, November.
- Burke, Gerard J. & Carrillo, Janice E. & Vakharia, Asoo J., 2007. "Single versus multiple supplier sourcing strategies," European Journal of Operational Research, Elsevier, vol. 182(1), pages 95-112, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.