Management Sciences and Quantitative Methods Commons^™

Can Contracts Replace Qualification In A Sourcing Process With Competitive Suppliers And Imperfect Information?, Yue Jin, Jennifer K. Ryan

Department of Supply Chain Management and Analytics: Faculty and Staff Publications

This paper considers a manufacturer who outsources the production of a product to multiple competing suppliers, who differ in their cost structures and in their capabilities for producing high-quality products. The manufacturer must design the sourcing process to ensure that the selected supplier has sufficient quality capability, while encouraging competition among the suppliers. We develop and analyze a mathematical model of performance-based contracting, a sourcing method that is appropriate when the manufacturer has imperfect information regarding the suppliers’ costs and capabilities. We compare the performance of performance-based contracting with that of a two-stage sourcing process, an alternative sourcing method that …