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Buyers want their suppliers to make efforts to improve performance in the delivery of products and services, but the effort is costly and often unobservable to the buyers. A common practice for inducing high-level supplier performance is to source from multiple suppliers and strategically allocate business based on their past performance. To investigate the design of such performance-based volume incentive schemes, we consider a buyer’s dual sourcing problem in a dynamic principal-agent setting. We find that, to maximize suppliers’ competition over time, the optimal allocation scheme should involve the suppliers’ current shares of business and is generally not a simple rankorder tournament or winner-take-all allocation. The optimal scheme allocates business according to each supplier’s performance relative to their respective optimal performance target, and may not reward the better performer a larger share. A simple way to achieve near-optimal results is the use of "handicapped rules" that can significantly outperform simple first-past-the-post rules.
|Publication status||Published - 15 Jul 2015|
|Event||27th European Conference on Operational Research - University of Strathclyde, Scotland, United Kingdom|
Duration: 12 Jul 2015 → 15 Jul 2015
|Conference||27th European Conference on Operational Research|
|Period||12/07/15 → 15/07/15|
- Supply Chain Management
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- 1 Finished
1/01/13 → 30/06/16
Project: Grant Research