A comparison of two sourcing tactics for a new component

Charles X. Wang, Scott Webster, Sidong Zhang

Research output: Contribution to journalArticle

Abstract

We compare two sourcing tactics for a manufacturer to purchase a new component to be used in a one-time production run of a new product with uncertain and price-elastic demand. One alternative is to issue a request-for-quote (RFQ), which is where the manufacturer requests a price-quantity schedule from suppliers. The manufacturer uses this information to determine a production quantity and the number of components to purchase from each supplier. The other alternative is to post a bid specifying how the manufacturer's purchase quantity will depend on the supplier's component price. The suppliers use this information to compete on quantity. We find that relative to RFQ, which is more challenging for the manufacturer to characterize the supplier response due to the possibility of supplier interaction, the benefit to the manufacturer from posting a bid increases with the number of suppliers due to increased intensity of competition. If the new component is from an emerging industry where there is little mutual awareness among candidate suppliers, then regardless of number of suppliers, expected manufacturer profit is higher under RFQ. Posting a bid is more likely to benefit the manufacturer when the new component is from a more established industry with a high degree of awareness among candidate suppliers.

Original languageEnglish (US)
Pages (from-to)310-317
Number of pages8
JournalEuropean Journal of Operational Research
Volume211
Issue number2
DOIs
StatePublished - Jun 1 2011
Externally publishedYes

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Keywords

  • RFQ
  • Reverse auctions
  • Short life-cycle product
  • Sourcing tactics
  • Uncertain price-sensitive demand

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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