Advanced Search
MyIDEAS: Login to save this paper or follow this series

Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing

Contents:

Author Info

  • Yim, Andrew

Abstract

The 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 Info

If 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.
File URL: http://mpra.ub.uni-muenchen.de/27858/
File Function: original version
Download Restriction: no

File URL: http://mpra.ub.uni-muenchen.de/29817/
File Function: revised version
Download Restriction: no

File URL: http://mpra.ub.uni-muenchen.de/33922/
File Function: revised version
Download Restriction: no

File URL: http://mpra.ub.uni-muenchen.de/45881/
File Function: revised version
Download Restriction: no

File URL: http://mpra.ub.uni-muenchen.de/55683/
File Function: revised version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27858.

as in new window
Length:
Date of creation: 18 Jun 2010
Date of revision:
Handle: RePEc:pra:mprapa:27858

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords: Supplier selection; supply base composition; latent defects; multiple sourcing; single sourcing; total cost of purchasing.;

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. 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.
  2. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, vol. 53(2), pages 241-259, February.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Jean-Jaques Laffont & Jean Tirole, 1985. "Auctioning Incentive Contracts," Working papers 403, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2000. "Information, Contracting, and Quality Costs," Management Science, INFORMS, vol. 46(6), pages 776-789, June.
  9. 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.
  10. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 507-33, Fall.
  11. James J. Anton & Dennis A. Yao, 1989. "Split Awards, Procurement, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 538-552, Winter.
  12. Kashi R. Balachandran & Suresh Radhakrishnan, 2005. "Quality Implications of Warranties in a Supply Chain," Management Science, INFORMS, vol. 51(8), pages 1266-1277, August.
  13. 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.
  14. 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.
  15. 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.
  16. Dasgupta, Sudipto & Spulber, Daniel F., 1989. "Managing procurement auctions," Information Economics and Policy, Elsevier, vol. 4(1), pages 5-29.
  17. 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.
  18. 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.
  19. 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.
  20. 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.
  21. 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.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:27858. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.