Managing supplier competition and sourcing sequence for component manufacturing

Abstract

We consider a setting in which a manufacturer sequentially sources two components and uses reverse auction to select a supplier with the lowest bidding price for each component. The manufacturer chooses a quantity to order from each supplier and a price for selling the final product. We show that the interplay between the direct competition faced by suppliers in providing their respective components and the sequence whereby the manufacturer sources components influence system performance in a subtle, and sometimes dramatic, way. As the direct competition for the early sourced component intensifies, the profit of its supplier will deteriorate while the profits of the other firms will improve. As the direct competition for the late sourced component intensifies, however, the profit of its supplier may improve, and the profits of the other supplier, the manufacturer, and the system can all decrease. Compared with when the manufacturer simultaneously sources the components, sequentially sourcing the components can benefit the manufacturer and every supplier. Furthermore, all the channel parties can unanimously agree on a specific sourcing sequence. All of these signify the importance for manufacturers to take appropriate measures to manage their sourcing procedures and the competition environments faced by their suppliers.