| As outsourcing has become an increasingly common practice, especially in the manufacturing industry, firms rely on external suppliers to procure goods and services. According to the U.S. Department of Commerce's 2006 report, approximately half of the revenue generated in the U.S. manufacturing industry is spent on procurement. Hence it is critical for firms to streamline procurement processes to maintain a competitive edge in the market. Procurement contracts are helpful arsenals for firms to manage uncertainties in the market. In this dissertation, we are interested in the design of procurement contracts as well as the best contracting structure in supply chains when there is uncertainty about the suppliers' costs.;In supply chains with many complementary suppliers, the manufacturer has two instruments to handle the asymmetric supplier cost information: contract types (simple versus complex) and contracting structure (delegated versus controlled). In Chapter 3, we study the impact of these two instruments on procurement: A manufacturer must choose to delegate component procurement to its tier-1 supplier, or to control component procurement by contracting with both the tier-1 supplier and the tier-2 component supplier. Both suppliers have private cost information and the manufacturer has an alternative source of supply with cost that may be known or unknown to the suppliers. We validate that if the firms may use arbitrarily complex contracts, then the manufacturer has the same expected profit with delegation as with control of component procurement. If, however, the firms use simple price-only contracts, then the manufacturer may achieve strictly greater expected profit with either delegation or control, depending upon the likelihood that tier-1 supplier's cost is high and the cost of alternative source. A numerical study shows that over a wide range of conditions, if the manufacturer chooses delegation versus control correctly, then she achieves nearly as much expected profit with price-only contracts as with the complex optimal contracts. The efficiency of price-only contracts, however, is contingent on the manufacturer making the right decision to delegate or control component procurement. In Chapter 4, we extend our base model in the previous chapter to show that there are additional factors that also play a critical role in determining the best contracting structure in component procurement: correlation in suppliers' costs, the quality of tier-1 supplier's information about tier-2 supplier's cost, and the existence of multiple tier-2 suppliers each with its own private cost information.;In this dissertation, we provide a how-to guide for component procurement under asymmetric supplier cost information. With smart procurement contracts and appropriately defined contracting structures, the impact of asymmetric supplier cost problem can be minimized.;For a simple supply chain with a manufacturer and a single supplier, the manufacturer can design smart procurement contracts to minimize the impact of the asymmetric supplier cost information. In Chapter 2, we search for simple yet efficient procurement contracts. The theory on optimal procurement contracts is well-established under asymmetric supplier cost information. However, contracts in practice frequently take simpler forms than what the theory predicts. We examine the tradeoff between simplicity and profitability of a procurement contract. Our results show that incremental quantity discount contracts, which are asymptotically optimal, can be highly efficient for the manufacturer. This is yet another explanation for the frequent use of these contracts in practice. |
