Competition and Technological Complexity in Procurement: An Empirical Study of Dual Sourcing

The role of competition in defense procurement has long been controversial due to the extraordinary demand for technological advance, the relatively small production quantities involved and the importance of learning by doing. Since the early 1980s, Defense Department policy has encouraged the use of competition in the production phase of procurement where possible, particularly for relatively simple technologies. Recent theory, however, suggests that splitting production between two bidders ("dual sourcing") produces strong incentives for collusion unless the bidders are unsure of each other's costs, e.g. for sophisticated technologies in the early phases of production. Furthermore, dual sourcing may help discipline contractors in settings where contractual incompleteness is a particular problem. For both these reasons, dual sourcing may be more valuable for complex, rather than simple, technologies. To date, however, there have been no attempts to investigate empirically how technological complexity affects the viability of competition in procurement. I explore the effects of dual sourcing using a panel dataset comprising 14 missile systems with an average of 12.5 years of production history per system. Each missile's complexity is categorized based on the nature of its guidance and control system. Simple missiles enjoy greater scale economies than complex missiles, but the learning curves for the two missile types are not significantly different. The effects of dual sourcing, though, depend importantly on the nature of the technology involved: it significantly speeds learning and interferes with scale economies for complex missiles, but has no significant effects for simple ones. Dual sourcing thus produces no apparent savings for simple missiles, but for the average complex missile dual sourcing lowers unit costs by the seventh year of dual sourcing. Whether these potential savings justify the costs of transferring technology to the second source and the possible weakening of R&D incentives remains an open question.

Competitive Bidding in Supply Chains

This thesis is primarily concerned with the competition between suppliers for a buyer’s procurement business with consideration of subcontracting, commitment and capacity reservation. Under the circumstance where suppliers face diseconomies of scale, it may be cost effective for a buyer to split an order across different suppliers. Even when the buyer chooses only one supplier, the winning supplier may subcontract part of the work to the others subsequently. Motivated by these observations, Chapter 2 studies a supplier bidding game where a buyer requests quotes from two competing suppliers. We consider two procurement scenarios: (1) Order Splitting where each supplier submits a function bid which specifies different payments for different quantities, and the buyer may split the order; (2) Single-Sourcing Commitment where the buyer commits to purchasing from only one supplier before suppliers submit their bids, and the winning supplier may subsequently subcontract with the losing one. The second and third papers investigate the competitive behaviour of suppliers with capacity reservation. To hedge against financial risks, the suppliers often require a buyer to reserve capacity in advance by paying an upfront fee. In Chapter 3, we consider a discrete version of this problem where competing suppliers each choose a reservation price and an execution price for blocks of capacity, and the buyer needs to decide which blocks to reserve. Chapter 4 studies a continuous version of the problem where we allow general cost functions. The suppliers compete by offering the price functions (for reservation and execution) and the buyer decides how much to reserve from each supplier. This thesis sheds light on how suppliers compete with each other by considering a variety of factors. We believe an in-depth look at the competitive behaviour of suppliers will deepen our understanding of a buyer’s procurement process, and hence helps a buyer make a better sourcing decision

Competitive Bidding in Supply Chains

This thesis is primarily concerned with the competition between suppliers for a buyer’s procurement business with consideration of subcontracting, commitment and capacity reservation. Under the circumstance where suppliers face diseconomies of scale, it may be cost effective for a buyer to split an order across different suppliers. Even when the buyer chooses only one supplier, the winning supplier may subcontract part of the work to the others subsequently. Motivated by these observations, Chapter 2 studies a supplier bidding game where a buyer requests quotes from two competing suppliers. We consider two procurement scenarios: (1) Order Splitting where each supplier submits a function bid which specifies different payments for different quantities, and the buyer may split the order; (2) Single-Sourcing Commitment where the buyer commits to purchasing from only one supplier before suppliers submit their bids, and the winning supplier may subsequently subcontract with the losing one. The second and third papers investigate the competitive behaviour of suppliers with capacity reservation. To hedge against financial risks, the suppliers often require a buyer to reserve capacity in advance by paying an upfront fee. In Chapter 3, we consider a discrete version of this problem where competing suppliers each choose a reservation price and an execution price for blocks of capacity, and the buyer needs to decide which blocks to reserve. Chapter 4 studies a continuous version of the problem where we allow general cost functions. The suppliers compete by offering the price functions (for reservation and execution) and the buyer decides how much to reserve from each supplier. This thesis sheds light on how suppliers compete with each other by considering a variety of factors. We believe an in-depth look at the competitive behaviour of suppliers will deepen our understanding of a buyer’s procurement process, and hence helps a buyer make a better sourcing decision

Strategic Analysis of Dual Sourcing and Dual Channel with an Unreliable Alternative Supplier

Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/148383/1/poms12938_am.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/148383/2/poms12938.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/148383/3/poms12938-sup-0001-AppendixS1.pd

What Type Of Enterprise Forges Close Links With Universities And Government Labs? Evidence From CIS 2

This paper tries to uncover some of the economic factors that encourage firms to seek information from universities and government labs or to collaborate with these institutions. We exploit the information contained in the second Community Innovation Surveys (CIS2) for France, Germany, Ireland and Spain. We estimate an ordered probit model on the importance of knowledge sourcing from universities and government labs controlling for selection bias, and a trivariate probit model explaining the innovation, collaboration in innovation, and collaboration with universities and government labs decisions with twice censored data. R&D-intensive firms and radical innovators tend to source knowledge from universities and government labs but not to cooperate with them directly. Outright collaborations in innovation with universities and government labs is characteristic of large firms, firms that patent or those that receive government support for innovation. Members of an enterprise group tend to cooperate in innovation but not directly with universities or government labs. Cette étude essaye de découvrir quels sont les facteurs économiques qui poussent les entreprises à chercher de l'information pour innover auprès des universités et des laboratoires publics de recherche ou à coopérer avec ces deux institutions. Nous nous servons des données de la seconde vague d'enquêtes communautaires d'innovation européennes (CIS2) pour l'Allemagne, la France, l'Espagne et l'Irlande. Nous estimons, d'une part, un modèle probit ordonné pour les universités et les laboratoires publics de recherche comme sources d'information, en contrôlant pour un biais de sélection et, d'autre part, un modèle probit trivarié pour les décisions successives d'innover, de collaborer et en particulier de collaborer avec les universités et les laboratoires publics de recherche, avec deux censures des données. Nous trouvons que les entreprises intensives en recherche et les innovateurs radicaux vont chercher de l'information auprès des universités et les laboratoires publics mais ne collaborent pas eux. Ces collaborations sont le fait de grandes firmes, d'entreprises breveteuses, et de celles qui reçoivent du support gouvermental pour innover. Des entreprises qui font partie d'un groupe ont tendance à collaborer mais pas nécessairement avec les universités et les laboratoires publics re recherche.Innovation, industry-university collaborations, knowledge sourcing, government labs, CIS2, Innovation, collaborations universités-entreprises, laboratoires publics de recherche, sources d'information pour innover, CIS2

Incentive Regulation, Investments and Technological Change

Based on an idiosyncratic reading of the literature I propose intermediate (rather than tight or soft) regulation for balancing investment incentives with allocative efficiency and competition objectives. Intermediate regulation is compatible with incentive regulation and helps lengthening the regulatory commitment period necessary for incentives. However, such commitment for the whole time horizon of infrastructure or innovation investments is impossible. The compatibility of incentive regulation and efficient investment is thus in doubt. Incentive regulation for regular infrastructure investments therefore needs periodic updating based on rate-of-return regulation criteria. Innovative infrastructure investments may warrant regulatory holidays, which should be conditioned on strict criteria.

Tales of a so(u)rcerer : optimal sourcing decisions under alternative capacitated suppliers and general cost structures

Most companies must procure items necessary for their businesses from out- side sources, where there are typically a number of competing suppliers with varying cost structures, price schemes, and capacities. This situation poses some interesting research questions from the outlook of different parties in the supply chain. We consider this problem from the perspective of (i) the party that needs to outsource, (ii) the party that is willing to serve as the source, and (iii) the party that has in-house capability to spare. We allow for stochastic demand, capacitated facilities (in-house and suppliers'), and general structures for all relevant cost components. Some simpler versions of this problem are shown to be NP-hard in the literature. We make use of a novel dynamic programming model with pseudo-polynomial complexity to address all three perspectives by solving the corresponding problems to optimality. Our modeling approach also lets us analyze different aspects of the problem environment such as pricing schemes and channel coordination issues. We derive several managerial insights, some of which are counter to collective intuition

Going global : a comparison of the relative attractiveness of global sourcing locations

Domestic organizations in competitive markets are often reliant on the sourcing of low-cost goods and services from suppliers located offshore, often located in China. History has shown that location advantages are not fixed, and evolve over time, creating a shift in when and when global sourcing opportunities present themselves. With the future success of so many organizations tied to low-cost China sourcing, China’s future competitiveness as a sourcing location is of critical importance. If China does indeed lose their competitive advantage, how will the potential reduction in China’s cost competitiveness impact those organizations reliant on China sourcing to compete in their marketplace?The purpose of this research is to determine what location factors drive the global sourcing decision-making process, the relative weights of these factors in making global sourcing decisions, and how different sourcing locations (including China) currently score in relative comparison to each other with regards to these factors. An understanding of these factors and how they effect the global sourcing decision-makers will allow organizations to understand which global locations might present opportunities for both their current and future global sourcing activities.The methodology used in this research is based on a mixed methods approach, grounded in an explanatory sequential design, with a focus in the basic qualitative research methodology. A quantitative survey was utilized to identify potential decision-making factors and weights, supplemented by semi-structured interviews to understand why the relevant factors are indeed relevant, and to provide trustworthiness, credibility, and dependability in the findings.Semi-structured interviews of two distinct populations (global sourcing practitioners and business advisors) were conducted, as was a survey of supply chain practitioners from the Supply Chain Management Association. This approach provided an opportunity to understand what factors are deemed important for practitioners making global sourcing decisions, and the relative factor weights these factors hold in the decision-making process. The methodology also provides insight into the potential differences between those who do (the practitioners), andthose who advise (the business advisors).The research findings indicate that China is not necessarily the most attractive global sourcing location for all global sourcing, and that results are dependent on where the organization is sourcing from, the competitive make-up of their industry, and the organization’s tolerance for risk.The practical implication and originality of this work is to provide a foundation for the subsequent building of a model analyzing the current state of comparative attractiveness with regards to which global sourcing locations are likely to provide the largest opportunities for organizations, given the organization’s location, global sourcing strategy, and organizational risk profile

Agency problems in structured finance – a case study of European CLOs

This paper is a case study that focuses on possible incentive problems in the management of Collateralized Loan Obligations (CLOs). CLOs are the most important type of special purpose vehicles in the leveraged loan market, and their managers appear to have a considerable impact on performance. Specifically, this article identifies the potential incentive, or agency, problems facing CLO managers, and the mechanisms that have been put in place to mitigate these problems. These mechanisms, including structural provisions, financial incentives and reputational concerns, should work fairly effectively. However, the analysis reveals some gaps which may allow managers to engage in certain adverse strategies. Specifically, the article raises concerns about the reliability of constraints on overall portfolio risk, the so-called portfolio tests, and about the effectiveness of reputation as a disciplining device. Both concerns are related to the benign market conditions until the summer of 2007 which – at least until now – prevented, any “stress-testing” of CLOs and differentiation between managers. This paper analyzes also evidence on CLO transactions in which managers buy/hold a portion of the equity tranche. Although retention of the equity tranche is only one of several incentive aligning mechanisms and not a general requirement, the analysis reveals that factors related to the agency problems can explain why in certain cases managers buy/hold a portion of the equity tranche. Specifically, first time managers and managers of a risky transaction buy/hold more frequently a portion of the equity tranche. Furthermore, buy/hold patterns change over time, which suggest that competitive effects and market trends play a role in the question whether to retain a portion of the equity tranchecredit risk transfer, moral hazard, asset securitisation, CLO's