Sourcing under incomplete information and negative capacity-cost correlation

Sourcing under incomplete information and negative capacity-cost correlation

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Article ID: iaor2016771
Volume: 67
Issue: 3
Start Page Number: 437
End Page Number: 449
Publication Date: Mar 2016
Journal: Journal of the Operational Research Society
Authors: ,
Keywords: combinatorial optimization, demand, stochastic processes
Abstract:

We study a sourcing problem where a buyer reserves capacity from a set of suppliers. The suppliers have finite capacity and their unit production cost is a decreasing function of their capacity, implying scale economies. The capacity of each supplier and therefore the cost is his private information. The buyer and other suppliers only know the probability distribution of the supplier’s capacity. The buyer’s demand is random and she has to decide how much capacity to reserve in advance from a subset of suppliers and how much to source from marketplace. In this study we determine the buyer’s optimum reservation quantity and the size of the supply base. We find the presence of such capacity cost correlation leads to supply base reduction.

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