Yim, Andrew (2011): Failure Risk and Quality Management in the Choice of Single versus Multiple Sourcing.
Download (299kB) | Preview
The advantage of multiple sourcing to protect against supplier failures arising from undependable products due to latent defects is examined using a model with non-linear external failure costs. Prior research has focused only on supplier failures arising from unreliable supply, such as late/insufficient/no delivery. I derive a closed-form characterization of the optimal production quota allocation for the LUX (Latent defect-Undependable product-eXternal failure) setting. The allocation determines the optimal supply base, with intuitive properties that hold under a mild condition. The condition includes the special case of equal procurement costs charged by suppliers but also allows unequal costs without any particular order. Necessary and sufficient conditions are also derived to determine (i) the exact size of the optimal supply base, provided the mild condition holds, and (ii) whether single or multiple sourcing is optimal, without requiring any precondition.
|Item Type:||MPRA Paper|
|Original Title:||Failure Risk and Quality Management in the Choice of Single versus Multiple Sourcing|
|Keywords:||Supplier selection, latent defects, multiple sourcing, single sourcing, quality cost, total cost of purchasing|
|Subjects:||M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M11 - Production Management
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out; Joint Ventures; Technology Licensing
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Andrew Yim|
|Date Deposited:||04. Apr 2011 02:14|
|Last Modified:||12. Feb 2013 21:38|
Alles, M., Datar, S. M., and Lambert, R. A. 1995. "Moral Hazard and Management Control in Just-in-time Settings," Journal of Accounting Research, 33S, 177-204.
Anton, J. J. and Yao, D. A. 1989. "Split Awards, Procurement, and Innovation," RAND Journal of Economics, 20, 538-552.
_______ 1992. "Coordination in Split Award Auctions," Quarterly Journal of Economics, 107, 681-707.
Arya, A. and Mittendorf, B. 2007. "Interacting Supply Chain Distortions: The Pricing of Internal Transfers and External Procurement," Accounting Review, 82(3), 551-580.
Auriol, E. and Laffont, J.-J. 1992. "Regulation by Duopoly," Journal of Economics and Management Strategy, 1, 507-533.
Babich, V., Burnetas, A. N., and Ritchken, P. H. 2007. "Competition and Diversification Effects in Supply Chains with Supplier Default Risk," Manufacturing & Service Operations Management, 9(2), 123.
Baiman, S., Fischer, P. E., and Rajan, M. V. 2000. "Information, Contracting, and Quality Costs," Management Science, 46, 776-789.
_______ 2001. "Performance Measurement and Design in Supply Chains," Management Science, 47(1), 173-188.
Balachandran, K. R. and Radhakrishnan, S. 2005. "Quality Implications of Warranties in a Supply Chain," Management Science, 51, 1266-77.
Barboza, D. 2007. "Mattel recalls toys made in China," The New York Times, Aug. 2.
_______ 2008a. "China Orders New Oversight of Heparin, With Tainted Batches Tied to U.S. Deaths," The New York Times, Mar. 22.
_______ 2008b. "Asia Food Tainting Spreads, Leading to Recall in U.S.," The New York Times, Sep. 27.
_______ 2008c. "China's contaminated food scandal widens," The New York Times, Oct. 31.
Barron, J. M. and Gjerde, K. P. 1996. "Total Quality Management (TQM): Theory and An Empirical Test," Journal of Economics and Management Strategy, 5, 69-106.
Benjaafar, S., Elahi, E., and Donohue, K. L. 2007. "Outsourcing via Service Competition," Management Science, 53(2), 241-259.
Berger, P. D., Gerstenfeld, A., and Zeng, A. Z. 2004. "How Many Suppliers Are Best? A Decision-analysis Approach," Omega: The International Journal of Management Science, 32, 9-15.
Berger, P. D. and Zeng, A. Z. 2006. "Single versus Multiple Sourcing in the Presence of Risks," Journal of the Operational Research Society, 57, 250-61.
Bogdanich, W. 2008a. "Blood Thinner Might Be Tied to More Deaths," The New York Times, Feb. 29.
_______ 2008b. "The Drug Scare That Exposed a World of Hurt," The New York Times, Mar. 30.
Bradsher, K. 2001. "Ford Intends to Replace 13 Million Firestone Wilderness Tires," The New York Times, May 23.
Burke, G. J., Carrillo, J. E. and Vakharia, A. J. 2007. "Single versus multiple supplier sourcing strategies," European Journal of Operational Research, 182(1), 95-112.
Cachon, G. P. 2003. "Supply Chain Coordination Contracts," Chapter 6 in Handbooks in Operations Research and Management Science: Supply Chain Management, edited by Steve Graves and Ton de Kok. North-Holland.
Chao, G. H., Iravani, S. M. R., and Savaskan, R. C. 2009. "Quality Improvement Incentives and Product Recall Cost Sharing Contracts," Management Science, 55(7), 1122-1138.
Cremer, J. 1995. "Towards an Economic Theory of Incentives in Just-in-time Manufacturing," European Economic Review, 39, 432-439.
Dada, M., Petruzzi, N. C., and Schwarz, L. B. 2007. "A Newsvendor's Procurement Problem when Suppliers Are Unreliable," Manufacturing & Service Operations Management, 9(1), 9-32.
Dana, J. D. and Spier, K. E. 1994. "Designing a Private Industry: Government Auctions with Endogenous Market Structure," Journal of Public Economics, 53, 127-147.
Dasgupta, S. and Daniel F. Spulber 1989/90. "Managing Procurement Auctions," Information Economics and Policy, 4, 5-29.
Degraeve, Z. and Roodhooft, F. 2000. "A Mathematical Programming Approach for Procurement Using Activity Based Costing," Journal of Business Finance & Accounting, 27, 69-98.
Deming, W. E. 1986. Out of the crisis. Cambridge, MA: MIT, Center for Advanced Engineering Study.
Demski, J. S., Sappington, D. E. M., and Spiller, P. T. 1987. "Managing Supplier Switching," RAND Journal of Economics, 18, 77-97.
Egan, K. K., Campbell, C. G., and Vogel, L. T. 2009. "Made in China: Five Opportunities Created by the Recent Recalls," FortheDefense, Mar..
Federgruen, A. and Yang, N. 2008. "Selecting a Portfolio of Suppliers Under Demand and Supply Risks," Operations Research, 56(4), 916-936.
_______ 2009. "Optimal Supply Diversification Under General Supply Risks," Operations Research, 57(6), 1451-1468.
Fuller, T. 2008. "The melamine stain: One sign of a worldwide problem," The New York Times, Oct.12.
Garrison, R. H., Noreen, E. W., and Brewer, P. C. 2008. Managerial Accounting, Twelfth Edition. McGraw-Hill/Irwin.
Grosfeld-Nir, A. and Gerchak, Y. 2004. "Multiple Lotsizing in Production to Order with Random Yields: Review of Recent Advances," Annals of Operations Research, 126, 43-69.
Hakim, D. 2004. "Another Recall Involving Ford, Firestone Tires And S.U.V.'s," The New York Times, Feb. 27.
Harris, G. 2008a. "Problems in Blood Drug Lead to Halt by Factory," The New York Times, Feb. 12.
_______ 2008b. "Heparin Contamination May Have Been Deliberate, F.D.A. Says," The New York Times, Apr. 30.
Horngren, C. T., Foster, G., and Datar, S. M. 1994. Cost Accounting: A Managerial Emphasis, Eighth Edition. Prentice Hall International.
Hwang, I., Radhakrishnan, S., and Su, L. (N.) 2006. "Vendor Certification and Appraisal: Implications for Supplier Quality," Management Science, 52, 1472-82.
Ittner, C. D. and Larcker, D. F. 1995. "Total Quality Management and the Choice of Information and Reward Systems," Journal of Accounting Research, 33S, 1-40.
Kouvelis, P., C. Chambers, and H. Wang 2006. "Supply Chain Management Research and Production and Operations Management: Review, Trends, and Opportunities," Production and Operations Management, 15, 449.
Laffont, J.-J. and Tirole, J. 1987. "Auctioning Incentive Contracts," Journal of Political Economy, 95, 921-937.
_______ 1988. "Repeated Auctions of Incentive Contracts, Investment, and Bidding Parity with an Application to Takeovers," RAND Journal of Economics, 19, 516-537.
Lemke, F., Goffin, K., Szwejczewski, M., Pfeiffer, R., and Lohmullerand, B. 2000. "Supplier Base Management: Experiences from the UK and Germany," International Journal of Logistics Management, 11, 45.
Lipton, E. S., and D. Barboza 2007. "As More Toys Are Recalled, Trail Ends in China," The New York Times, Jun. 19.
McGuire, T. G., and Riordan, M. H. 1995. "Incomplete Information and Optimal Market Structure Public Purchases from Private Providers," Journal of Public Economics, 56, 125-141.
McMillan, J. 1990. "Managing Suppliers: Incentive Systems in Japanese and U.S. Industry," California Management Review, Summer, 38-55.
Mishra, A. K. and Tadikamalla, P. R. 2006. "Order Splitting in Single Sourcing with Scheduled-release Orders," Journal of the Operational Research Society, 57, 177-89.
Myerson, R. B. 1981. "Optimal Auction Design," Mathematics of Operations Research, 6, 58-73.
Nagar, V. and Rajan, M. V. 2001. "The Revenue Implications of Financial and Operational Measures of Product Quality," Accounting Review, 76(4), 495-513.
Paris, J.-F. & Long, D. D. E. 2006. "Using device diversity to protect data against batch-correlated disk failures," Proceedings of the 2nd ACM Workshop on Storage Security and Survivability (StorageSS 2006).
Porter, M. E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press; London: Collier Macmillan.
PricewaterhouseCoopers 2008. Global Sourcing: Shifting Strategies - A Survey of Retail and Consumer Companies.
Riordan, M. H. 1996. "Contracting with Qualified Suppliers," International Economic Review, 37, 115-128.
Riordan, M. H. and Sappington, D. E. M. 1989. "Second Sourcing," RAND Journal of Economics, 20, 41-58.
Ruiz-Torres, A. J. and Mahmoodi, F. 2006. "A Supplier Allocation Model Considering Delivery Failure, Maintenance and Supplier Cycle Costs," International Journal of Production Economics, 103, 755-66.
_______ 2007. "The Optimal Number of Suppliers Considering the Costs of Individual Supplier Failures," Omega: The International Journal of Management Science, 35, 104-15.
Seshadri, S., Chatterjee, K., and Lilien, G. L. 1991. "Multiple Source Procurement," Marketing Science, 10, 246-263.
Shepardson, D. 2010. "Toyoda 'deeply sorry' for runaway car deaths" at http://detnews.com/article/ 20100224/AUTO01/2240399. Accessed on 13 March 2010.
Story, L. and Barboza, D. 2007. "Mattel Recalls 19 Million Toys Sent From China," The New York Times, Aug. 15.
Takayama, A. 1985. Mathematical Economics, Second Edition. Cambridge: Cambridge University Press.
Tunca, T. I. and Wu, Q. 2009. "Multiple Sourcing and Procurement Process Selection with Bidding Events," Management Science, 55(5), 763-780.
Weber, C. A., Current, J. R., and Benton, W. C. 1991. "Vendor Selection Criteria and Methods," European Journal of Operational Research, 50, 2-18.
Wruck, K. H. and Jensen, M. C. 1994. "Science, Specific Knowledge, and Total Quality Management," Journal of Accounting and Economics, 18, 247-287.
Yano, C. A. and Lee, H. L. 1995. "Lot Sizing and Random Yields: A Review," Operations Research, 43, 311-334.
Available Versions of this Item
Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing. (deposited 04. Jan 2011 22:07)
Failure Risk and Quality Management in the Choice of Single versus Multiple Sourcing. (deposited 04. Apr 2011 02:14)
- Failure risk and quality cost management in the choice of single versus multiple sourcing. (deposited 06. Oct 2011 19:39)
- Failure Risk and Quality Management in the Choice of Single versus Multiple Sourcing. (deposited 04. Apr 2011 02:14) [Currently Displayed]