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Optimal Sourcing Orders under Supply Disruptions and the Strategic Use of Buffer Suppliers
Author(s)
Date Issued
2014-10
Date Available
2014-10-23T08:57:52Z
Abstract
This paper analyses procurement from two, risk-averse, suppliers who are
responsible for the timely delivery of some inputs. Their production is subject to inherent
disruptions. We characterize the optimal contracts when suppliers can invest to lower the risk of delays that are costly to the manufacturer. When investment is contractible, we show that issuing asymmetric contracts, whereby the buyer is more heavily dependent on one supplier, is optimal as the cost associated with supply disruptions increases. When investment is not contractible, we show that large orders can be used as an incentive devise. Thus, the strategy consisting of selecting one supplier as a main producer and another as a buffer has further desirable advantages under moral hazard.
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Series
UCD Centre for Economic Research Working Paper Series
WP14/17
Copyright (Published Version)
2014 the authors
Web versions
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
File(s)
Owning collection
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Mar 28, 2024
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