IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v206y2010i2p374-383.html
   My bibliography  Save this article

Contracting with an urgent supplier under cost information asymmetry

Author

Listed:
  • Xu, He
  • Shi, Ning
  • Ma, Shi-hua
  • Lai, Kin Keung

Abstract

We investigate a contract setting problem faced by a manufacturer who can procure major modules from an overseas supplier, as well as a local supplier. The overseas supplier is prime and offers quality products, whereas the local supplier is viewed only as a backup, and its products are inferior in quality. As the local supplier needs to put in additional effort to fulfill the urgent orders, it is difficult for the manufacturer to estimate this urgent supplier's production cost. This asymmetric cost information becomes an obstacle for the manufacturer in managing the urgent supplier. In this paper, we study two types of contingent contracts. One is the common price-only contract, and the other is a contract menu consisting of a transfer payment and a lead time quotation. We construct a Stackelberg game model and evaluate how the involvement of an urgent supplier with private cost information affects performances of the prime supplier and the manufacturer in different scenarios (with or without the urgent supplier, under different contingent contracts). We also conduct numerical experiments to show how the parameters of the contracts affect profits of the manufacturer.

Suggested Citation

  • Xu, He & Shi, Ning & Ma, Shi-hua & Lai, Kin Keung, 2010. "Contracting with an urgent supplier under cost information asymmetry," European Journal of Operational Research, Elsevier, vol. 206(2), pages 374-383, October.
    • Handle: RePEc:eee:ejores:v:206:y:2010:i:2:p:374-383
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377-2217(10)00211-0
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Özalp Özer & Wei Wei, 2006. "Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information," Management Science, INFORMS, vol. 52(8), pages 1238-1257, August.
    2. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    3. Charles J. Corbett & Deming Zhou & Christopher S. Tang, 2004. "Designing Supply Contracts: Contract Type and Information Asymmetry," Management Science, INFORMS, vol. 50(4), pages 550-559, April.
    4. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, Decembrie.
    5. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    6. Kay-Yut Chen & Murat Kaya & Özalp Özer, 2008. "Dual Sales Channel Management with Service Competition," Manufacturing & Service Operations Management, INFORMS, vol. 10(4), pages 654-675, June.
    7. Jaisingh, Jeevan & Barron, Jack & Mehta, Shailendra & Chaturvedi, Alok, 2008. "Privacy and pricing personal information," European Journal of Operational Research, Elsevier, vol. 187(3), pages 857-870, June.
    8. Wang, Jian-Cai & Lau, Hon-Shiang & Lau, Amy Hing Ling, 2009. "When should a manufacturer share truthful manufacturing cost information with a dominant retailer?," European Journal of Operational Research, Elsevier, vol. 197(1), pages 266-286, August.
    9. Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
    10. Zhibin (Ben) Yang & Göker Ayd{i}n & Volodymyr Babich & Damian R. Beil, 2009. "Supply Disruptions, Asymmetric Information, and a Backup Production Option," Management Science, INFORMS, vol. 55(2), pages 192-209, February.
    11. Gérard P. Cachon & Fuqiang Zhang, 2006. "Procuring Fast Delivery: Sole Sourcing with Information Asymmetry," Management Science, INFORMS, vol. 52(6), pages 881-896, June.
    12. Chen, Kebing & Xiao, Tiaojun, 2009. "Demand disruption and coordination of the supply chain with a dominant retailer," European Journal of Operational Research, Elsevier, vol. 197(1), pages 225-234, August.
    13. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    14. Sucky, Eric, 2006. "A bargaining model with asymmetric information for a single supplier-single buyer problem," European Journal of Operational Research, Elsevier, vol. 171(2), pages 516-535, June.
    15. Suresh P. Sethi & Houmin Yan & Hanqin Zhang, 2003. "Inventory Models with Fixed Costs, Forecast Updates, and Two Delivery Modes," Operations Research, INFORMS, vol. 51(2), pages 321-328, April.
    16. Andy A. Tsay, 1999. "The Quantity Flexibility Contract and Supplier-Customer Incentives," Management Science, INFORMS, vol. 45(10), pages 1339-1358, October.
    17. Jinfa Chen & David D. Yao & Shaohui Zheng, 2001. "Optimal Replenishment and Rework with Multiple Unreliable Supply Sources," Operations Research, INFORMS, vol. 49(3), pages 430-443, June.
    18. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    19. Awi Federgruen & Nan Yang, 2008. "Selecting a Portfolio of Suppliers Under Demand and Supply Risks," Operations Research, INFORMS, vol. 56(4), pages 916-936, August.
    20. Albert Y. Ha & Shilu Tong, 2008. "Contracting and Information Sharing Under Supply Chain Competition," Management Science, INFORMS, vol. 54(4), pages 701-715, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anna Nagurney & Dong Li, 2014. "Equilibria and dynamics of supply chain network competition with information asymmetry in quality and minimum quality standards," Computational Management Science, Springer, vol. 11(3), pages 285-315, July.
    2. Wang, Hong, 2013. "Contingent payment auction mechanism in multidimensional procurement auctions," European Journal of Operational Research, Elsevier, vol. 224(2), pages 404-413.
    3. Wu, Zhengping & Crama, Pascale & Zhu, Wanshan, 2012. "The newsvendor’s optimal incentive contracts for multiple advertisers," European Journal of Operational Research, Elsevier, vol. 220(1), pages 171-181.
    4. Yang, Rui & Tang, Wansheng & Dou, Mengdi & Zhang, Jianxiong, 2021. "Pricing and investing in co-creation with customers for a duopoly," International Journal of Production Economics, Elsevier, vol. 237(C).
    5. Svoboda, Josef & Minner, Stefan & Yao, Man, 2021. "Typology and literature review on multiple supplier inventory control models," European Journal of Operational Research, Elsevier, vol. 293(1), pages 1-23.
    6. Matsui, Kenji, 2019. "A supply chain member should set its margin later if another member's cost is highly uncertain," European Journal of Operational Research, Elsevier, vol. 275(1), pages 127-138.
    7. Ma, Miaomiao & Meng, Weidong & Li, Yuyu & Huang, Bo, 2023. "Impact of dual credit policy on new energy vehicles technology innovation with information asymmetry," Applied Energy, Elsevier, vol. 332(C).
    8. Li, Yina & Xu, Xuejun & Zhao, Xiande & Yeung, Jeff Hoi Yan & Ye, Fei, 2012. "Supply chain coordination with controllable lead time and asymmetric information," European Journal of Operational Research, Elsevier, vol. 217(1), pages 108-119.
    9. Yan, Bo & Wang, Tao & Liu, Yan-ping & Liu, Yang, 2016. "Decision analysis of retailer-dominated dual-channel supply chain considering cost misreporting," International Journal of Production Economics, Elsevier, vol. 178(C), pages 34-41.
    10. Zeng, Amy Z. & Xia, Yu, 2015. "Building a mutually beneficial partnership to ensure backup supply," Omega, Elsevier, vol. 52(C), pages 77-91.
    11. Babich, Volodymyr & Li, Hantao & Ritchken, Peter & Wang, Yunzeng, 2012. "Contracting with asymmetric demand information in supply chains," European Journal of Operational Research, Elsevier, vol. 217(2), pages 333-341.
    12. Egri, Péter & Kis, Tamás & Kovács, András & Váncza, József, 2014. "An inverse economic lot-sizing approach to eliciting supplier cost parameters," International Journal of Production Economics, Elsevier, vol. 149(C), pages 80-88.
    13. Kebing Chen & Renxing Xu & Hanwei Fang, 2016. "Information Disclosure Model Under Supply Chain Competition with Asymmetric Demand Disruption," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 33(06), pages 1-35, December.
    14. Huang, Song & Guan, Xu & Xiao, Binqing, 2018. "Incentive provision for demand information acquisition in a dual-channel supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 116(C), pages 42-58.
    15. Xu, He & Yao, Nian & Tong, Shilu, 2013. "Sourcing under cost information asymmetry when facing time-sensitive customers," International Journal of Production Economics, Elsevier, vol. 144(2), pages 599-609.
    16. Zhao, Senlin & You, Zhuangzhuang & Zhu, Qinghua, 2022. "Effects of asymmetric cost information on collection outsourcing of used products for remanufacturing," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 162(C).
    17. Biswas, Indranil & Avittathur, Balram & Chatterjee, Ashis K, 2016. "Impact of structure, market share and information asymmetry on supply contracts for a single supplier multiple buyer network," European Journal of Operational Research, Elsevier, vol. 253(3), pages 593-601.
    18. Yixin Zhang & Xifu Wang, 2019. "Procurement Strategy with Backup Sourcing under Stochastic Supply Risk," Complexity, Hindawi, vol. 2019, pages 1-15, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xu, He & Yao, Nian & Tong, Shilu, 2013. "Sourcing under cost information asymmetry when facing time-sensitive customers," International Journal of Production Economics, Elsevier, vol. 144(2), pages 599-609.
    2. Chen, Kebing & Xiao, Tiaojun, 2015. "Outsourcing strategy and production disruption of supply chain with demand and capacity allocation uncertainties," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 243-257.
    3. Mandal, Prasenjit & Jain, Tarun, 2021. "Partial outsourcing from a rival: Quality decision under product differentiation and information asymmetry," European Journal of Operational Research, Elsevier, vol. 292(3), pages 886-908.
    4. Xin Yun & Hao Liu & Yi Li & Kin Keung Lai, 2023. "Contract design under asymmetric demand information for sustainable supply chain practices," Annals of Operations Research, Springer, vol. 324(1), pages 1429-1459, May.
    5. Roemer, Nils & Müller, Sven & Voigt, Guido, 2023. "A choice-based optimization approach for contracting in supply chains," European Journal of Operational Research, Elsevier, vol. 305(1), pages 271-286.
    6. Zhengping Wu & Wanshan Zhu & Pascale Crama, 2011. "The Newsvendor Problem with Advertising Revenue," Manufacturing & Service Operations Management, INFORMS, vol. 13(3), pages 281-296, July.
    7. Mingzhu Yu & Ruina Yang & Zelong Yi & Xuwen Cong, 2020. "Contracting in Ocean Shipping Market Under Asymmetric Information," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(02), pages 1-24, March.
    8. Yong Zha & Kehong Chen & Xiaohang Yue & Yugang Yu & Samar Mukhopadhyay, 2019. "Trade credit contract in the presence of retailer investment opportunity," Naval Research Logistics (NRL), John Wiley & Sons, vol. 66(4), pages 283-296, June.
    9. Erica L. Plambeck & Terry A. Taylor, 2007. "Implications of Renegotiation for Optimal Contract Flexibility and Investment," Management Science, INFORMS, vol. 53(12), pages 1872-1886, December.
    10. Z. Justin Ren & Morris A. Cohen & Teck H. Ho & Christian Terwiesch, 2010. "Information Sharing in a Long-Term Supply Chain Relationship: The Role of Customer Review Strategy," Operations Research, INFORMS, vol. 58(1), pages 81-93, February.
    11. Leng, Mingming & Zhu, An, 2009. "Side-payment contracts in two-person nonzero-sum supply chain games: Review, discussion and applications," European Journal of Operational Research, Elsevier, vol. 196(2), pages 600-618, July.
    12. Fang, Yaner & Shou, Biying, 2015. "Managing supply uncertainty under supply chain Cournot competition," European Journal of Operational Research, Elsevier, vol. 243(1), pages 156-176.
    13. Lusheng Shao & Xiaole Wu & Fuqiang Zhang, 2020. "Sourcing Competition under Cost Uncertainty and Information Asymmetry," Production and Operations Management, Production and Operations Management Society, vol. 29(2), pages 447-461, February.
    14. Lau, Amy Hing Ling & Lau, Hon-Shiang & Wang, Jian-Cai, 2008. "How a dominant retailer might design a purchase contract for a newsvendor-type product with price-sensitive demand," European Journal of Operational Research, Elsevier, vol. 190(2), pages 443-458, October.
    15. Cai, W. & Singham, D.I., 2018. "A principal–agent problem with heterogeneous demand distributions for a carbon capture and storage system," European Journal of Operational Research, Elsevier, vol. 264(1), pages 239-256.
    16. İsmail Bakal & Nesim Erkip & Refik Güllü, 2011. "Value of supplier’s capacity information in a two-echelon supply chain," Annals of Operations Research, Springer, vol. 191(1), pages 115-135, November.
    17. Zhang, Dengfeng & de Matta, Renato & Lowe, Timothy J., 2010. "Channel coordination in a consignment contract," European Journal of Operational Research, Elsevier, vol. 207(2), pages 897-905, December.
    18. Sainathan, Arvind & Groenevelt, Harry, 2019. "Vendor managed inventory contracts – coordinating the supply chain while looking from the vendor’s perspective," European Journal of Operational Research, Elsevier, vol. 272(1), pages 249-260.
    19. Ruina Yang & Lijun Ma, 2017. "Two-part tariff contracting with competing unreliable suppliers in a supply chain under asymmetric information," Annals of Operations Research, Springer, vol. 257(1), pages 559-585, October.
    20. Senlin Zhao & Qinghua Zhu, 2017. "Remanufacturing supply chain coordination under the stochastic remanufacturability rate and the random demand," Annals of Operations Research, Springer, vol. 257(1), pages 661-695, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:206:y:2010:i:2:p:374-383. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.