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Delegation vs. Control of Component Procurement Under Asymmetric Cost Information and Simple Contracts

Author

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  • Enis Kayis

    (Department of Industrial Engineering, Ozyegin University, Istanbul 34794, Turkey)

  • Feryal Erhun

    (Department of Management Science and Engineering, Stanford University, Stanford, California 94305)

  • Erica L. Plambeck

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

A manufacturer must choose whether to delegate component procurement to her tier 1 supplier or control it directly. Because of information asymmetry about suppliers' production costs and the use of simple quantity discount or price-only contracts, either delegation or control can yield substantially higher expected profit for the manufacturer. Delegation tends to outperform control when (1) the manufacturer is uncertain about the tier 1 supplier's cost and believes that it is likely to be high; (2) the manufacturer and the tier 1 supplier know the tier 2 supplier's cost or at least that it will be high; (3) the manufacturer has an alternative to engaging the tier 1 and tier 2 suppliers, such as in-house production; and (4) the firms use price-only contracts as opposed to quantity discount contracts. These results shed light on practices observed in the electronics industry.

Suggested Citation

  • Enis Kayis & Feryal Erhun & Erica L. Plambeck, 2013. "Delegation vs. Control of Component Procurement Under Asymmetric Cost Information and Simple Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 45-56, April.
    • Handle: RePEc:inm:ormsom:v:15:y:2013:i:1:p:45-56
    DOI: 10.1287/msom.1120.0395
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