Split-Award Auctions for Supplier Retention

Aadhaar Chaturvedi (), Damian R. Beil () and Victor Martínez- de-Albéniz ()
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Aadhaar Chaturvedi: Department of Business Administration, University of Namur, B-5000 Namur, Belgium
Damian R. Beil: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Victor Martínez- de-Albéniz: IESE Business School, University of Navarra, 08034 Barcelona, Spain

Management Science, 2014, vol. 60, issue 7, 1719-1737

Abstract: To stay abreast of current supply-market pricing, it is common for procurement managers to frequently organize auctions among a pool of qualified suppliers (the supply base ). Sole awards can alienate losing suppliers and cause them to defect from the supply base. To maintain the supply base and thereby control the high costs of finding and qualifying new suppliers, buyers often employ split awards, which in turn inflate purchase costs. This results in a trade-off that we investigate in an infinite-horizon stationary setting in which the relative cost position of each supplier is randomly drawn in every period. We characterize the optimal split award that minimizes long-run costs (purchasing and qualification) and show that maintaining a constant supply-base size---using a “qualify-up-to” policy---is optimal for the buyer. We find that neither the extent of multisourcing nor the buyer's value of split awards compared with winner-take-all auctions are monotonic in the qualification cost and that split-award auctions can increase ex ante system, buyer, and supplier benefits simultaneously. To our knowledge, this is the first paper studying split-award auctions for supply-base maintenance, and it will hopefully galvanize further research on this important topic. This paper was accepted by Yossi Aviv, operations management.

Keywords: auctions; split awards; multisourcing; supply base (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (16)

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