Now showing 1 - 3 of 3
  • Publication
    Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations
    (University College Dublin. School of Economics, 2013-10) ;
    This paper characterizes the optimal contracts issued to suppliers when delivery is subject to disruptions and when they can invest to reduce such a risk. When investment is contractible dual sourcing is generally optimal because it reduces the risk of disruption. The manufacturer (buyer) either issues symmetric contracts or selects one supplier as a major provider who invests while the buffer supplier does not. An increased reliance on single sourcing or on a major supplier is optimal under moral hazard. Indeed, we show that order consolidation increases the manufacturer’s profits because it serves as an incentive device in inducing investment.
  • Publication
    Optimal Management of Supply Disruptions when Contracting with Unreliable, Risk-averse, Suppliers
    (University College Dublin. School of Economics, 2017-06) ;
    This paper investigates the optimal management of supply disruptions by a manufacturer who uses order inflation and/or investments in process reliability when contracting two risk-averse suppliers. We consider that these investments can be subject to moral hazard. Technically we solve a newsvendor optimization problem using a random capacity model of disruption. In such a model, the order size does not affect the average production but impacts the probability of disruption. When investments are verifiable we show that the manufacturer is more inclined to invest in the suppliers’ reliability and then refrain from using order inflation when the suppliers’ production costs and the cost of disposing of unwanted inputs are large. When investments are not verifiable we show that the order sizes can be used strategically as incentive devises due to the suppliers’ sensitivity to payoff dispersion. We show that the manufacturer does not always increase his reliance on order inflation and face less reliable suppliers once we introduce moral hazard. In some instances he induces suppliers to undertake larger investments in reliability by increasing the order size. In other instances he is able to reduce his reliance on order inflation.
  • Publication
    Optimal Sourcing Orders under Supply Disruptions and the Strategic Use of Buffer Suppliers
    (University College Dublin. School of Economics, 2014-10) ;
    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.