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Outsourcing through competition: What is the best competition parameter?

  • Elahi, Ehsan
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    In this paper we consider a single buyer who wants to outsource the manufacturing of a product to N potential suppliers. The buyer's objective is to maximize the service level she receives from the suppliers. The suppliers compete for the buyer's demand based on a competition parameter which the buyer announces along with an allocation rule. We model each supplier as a make-to-stock queueing system. Using a simple proportional allocation function, we compare two competition parameters: service level and inventory level. We show that inventory competition creates a higher overall service level for the buyer. We also show an optimal form of competition parameter which can induce the maximum feasible service level. Our base model shows the results for the competition between identical suppliers. We then extend the results to a case where the suppliers are heterogeneous.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0925527313001096
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    Article provided by Elsevier in its journal International Journal of Production Economics.

    Volume (Year): 144 (2013)
    Issue (Month): 1 ()
    Pages: 370-382

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    Handle: RePEc:eee:proeco:v:144:y:2013:i:1:p:370-382
    Contact details of provider: Web page: http://www.elsevier.com/locate/ijpe

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    1. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
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    5. Kut C. So, 2000. "Price and Time Competition for Service Delivery," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 392-409, April.
    6. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, vol. 53(2), pages 241-259, February.
    7. Colin E. Bell & Shaler Stidham, Jr., 1983. "Individual versus Social Optimization in the Allocation of Customers to Alternative Servers," Management Science, INFORMS, vol. 29(7), pages 831-839, July.
    8. Albert Y. Ha & Lode Li & Shu-Ming Ng, 2003. "Price and Delivery Logistics Competition in a Supply Chain," Management Science, INFORMS, vol. 49(9), pages 1139-1153, September.
    9. Xiao, Tiaojun & Yang, Danqin, 2008. "Price and service competition of supply chains with risk-averse retailers under demand uncertainty," International Journal of Production Economics, Elsevier, vol. 114(1), pages 187-200, July.
    10. Wu, Cheng-Han, 2012. "Price and service competition between new and remanufactured products in a two-echelon supply chain," International Journal of Production Economics, Elsevier, vol. 140(1), pages 496-507.
    11. Yunzeng Wang & Yigal Gerchak, 2001. "Supply Chain Coordination when Demand Is Shelf-Space Dependent," Manufacturing & Service Operations Management, INFORMS, vol. 3(1), pages 82-87, August.
    12. Joseph Hall & Evan Porteus, 2000. "Customer Service Competition in Capacitated Systems," Manufacturing & Service Operations Management, INFORMS, vol. 2(2), pages 144-165, November.
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