Wholesale Price Auctions for Dual Sourcing under Supply Risk

Abstract

Wholesale price bids commonly occur in procurement auctions where dual sourcing is usually employed to mitigate supply risks. When at most two winners are required, unreliable wholesale price bidders face the unique trade‐off between unit margin and quantity allocation that depends on both winners' bids and the reliabilities. Motivated by above facts and considerations, we investigate several auction formats accommodating wholesale price bids for dual sourcing under newsvendor market, with unreliable suppliers possessing private costs. Generalized first‐price auction (GFA) is designed under known cost distribution, while generalized English auction (GEA) and optimal auction with learning (OAL) are examined under unknown distribution. Through a preannounced allocation rule to curb the bidding behavior, both GFA and OAL balance information rent and quantity allocation and generate various diversification degrees. Information asymmetry under GFA depresses the quantity proportion for high‐cost winner, because he charges higher unit information rent than low‐cost winner does. In contrast, two winners in GEA collude at the same price and thus split the order quantity evenly. The full diversification possibly enables GEA to generate higher service level than GFA under high supply risk, although the expected output quantity of GEA is always lower. Regarding the practical requirement for auction format choice, when the costs of implementation and distribution acquisition are not negligible, the previous analysis suggests that the favorable format is driven from GFA or OAL to GEA, as supply risk or the number of bidders increases, or as retail price exceeds a threshold. We also extend to multisourcing cases and examine the impacts of salvage and lost sale on auction format choice.

Operational Risks and Firm Market Performance: Evidence from China*

“…Firms and their supply chain partners must build robust and resilient practices to cushion their operations from unforeseen disruptions (Gao, Simchi‐Levi, Teo, & Yan, 2019). Dual sourcing (Huang, Li, & Xu, 2018), flexible procurement contracts (Chen, Dada, & Hu, 2017), flexible designs (Bai et al., 2019), and various technologies (Bai & Sarkis, 2020) are potential strategies to mitigate disruption occurrences. Firms should also ensure the allocation of financial and logistical resources to implement recovery plans, policies, and strategies at the supply chain and firm levels (Ivanov, Dolgui, Sokolov, & Ivanova, 2017).…”

A Review of the Existing and Emerging Topics in the Supply Chain Risk Management Literature

“…to explain supply chain risk mitigation through co-location activities versus traditional supplier dispersion techniques, which propagates an interesting debate surrounding supply chain design strategies. Auction theory (Chaturvedi & Martínez-de-Albéniz, 2011;Huang, Li, & Xu, 2018) provides insight into supplier bidding design and how supply risks and information costs play a role. Perhaps there may be other factors influencing this process.…”

Mechanism design of incentive-based reverse auctions with loss-averse 3PLs under incomplete attributes

“…An excellent review of the literature can be available in [17]. Whereas adopting auctions for the procurement of customized goods and services to satisfy the buyer’s unique needs poses challenges due to the incomplete attributes such as cost uncertainty, supply risks and delivery disruptions [18–20]. The development of the auction models for incomplete attributes is very recent field of research that has increasingly received much attention in operations management.…”