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

Kayiş, Enis; Erhun, Feryal; Plambeck, Erica L.

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.

CONTRACTS; INDUSTRIAL procurement; INFORMATION asymmetry; INDUSTRIAL costs; QUANTITY discounts; INDUSTRIALISTS; SUPPLIERS; CORPORATE profits

Manufacturing & Service Operations Management (M&SOM), 2013, Vol 15, Issue 1, p45

1526-5498

Academic Journal

10.1287/msom.1120.0395