Volume Incentive Through Performance-based Allocation of Business

Li Ping LIANG, Derek ATKINS

Research output: Other Conference ContributionsPresentation

Abstract

Buyers want their suppliers to make efforts to improve performance in the delivery of products and services. However, such efforts are costly and often unobservable to the buyers. A common practice for inducing high-level supplier performance is to source from multiple suppliers and to strategically allocate business to such suppliers 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, which is generally not a simple rank-order tournament. The optimal scheme allocates business according to each supplier's performance relative to their respective optimal performance target, which 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.
Original languageEnglish
Publication statusPublished - 11 Jul 2013
Event2013 International DSI and Asia Pacific DSI Conference - Courtyard Marriott - Nusa Dua, Bali, Indonesia
Duration: 9 Jul 201313 Jul 2013
http://gebrc.nccu.edu.tw/proceedings/APDSI/2013/

Conference

Conference2013 International DSI and Asia Pacific DSI Conference
CountryIndonesia
CityBali
Period9/07/1313/07/13
Internet address

Fingerprint

Incentives
Suppliers
Buyers
Supplier performance
Dual sourcing
Optimal allocation
Incentive schemes
Rank-order tournaments
Reward

Cite this

LIANG, L. P., & ATKINS, D. (2013). Volume Incentive Through Performance-based Allocation of Business. 2013 International DSI and Asia Pacific DSI Conference, Bali, Indonesia.
LIANG, Li Ping ; ATKINS, Derek. / Volume Incentive Through Performance-based Allocation of Business. 2013 International DSI and Asia Pacific DSI Conference, Bali, Indonesia.
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LIANG, LP & ATKINS, D 2013, 'Volume Incentive Through Performance-based Allocation of Business', 2013 International DSI and Asia Pacific DSI Conference, Bali, Indonesia, 9/07/13 - 13/07/13.

Volume Incentive Through Performance-based Allocation of Business. / LIANG, Li Ping; ATKINS, Derek.

2013. 2013 International DSI and Asia Pacific DSI Conference, Bali, Indonesia.

Research output: Other Conference ContributionsPresentation

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AU - ATKINS, Derek

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AB - Buyers want their suppliers to make efforts to improve performance in the delivery of products and services. However, such efforts are costly and often unobservable to the buyers. A common practice for inducing high-level supplier performance is to source from multiple suppliers and to strategically allocate business to such suppliers 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, which is generally not a simple rank-order tournament. The optimal scheme allocates business according to each supplier's performance relative to their respective optimal performance target, which 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.

UR - http://gebrc.nccu.edu.tw/proceedings/APDSI/2013/proc/P130129009.pdf

UR - http://gebrc.nccu.edu.tw/proceedings/APDSI/2013/pdf/2013program.pdf

M3 - Presentation

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LIANG LP, ATKINS D. Volume Incentive Through Performance-based Allocation of Business. 2013. 2013 International DSI and Asia Pacific DSI Conference, Bali, Indonesia.