Supply Auctions and Relational Contracts for Procurement
Manufacturing & Service Operations Management
Score! a better way to do busine$$: moving from conflict to collaboration
Score! a better way to do busine$$: moving from conflict to collaboration
Competition and Diversification Effects in Supply Chains with Supplier Default Risk
Manufacturing & Service Operations Management
Second Sourcing vs. Sole Sourcing with Capacity Investment and Asymmetric Information
Manufacturing & Service Operations Management
Mitigating Supply Risk: Dual Sourcing or Process Improvement?
Manufacturing & Service Operations Management
Independence of Capacity Ordering and Financial Subsidies to Risky Suppliers
Manufacturing & Service Operations Management
Capacity Investment Timing by Start-ups and Established Firms in New Markets
Management Science
The Relational Advantages of Intermediation
Management Science
Managing Disruption Risk: The Interplay Between Operations and Insurance
Management Science
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Contracting with suppliers prone to default is an increasingly common problem in some industries, particularly automotive manufacturing. We model this phenomenon as a two-period contracting game with two identical suppliers, a single buyer, deterministic demand, and uncertain production costs. The suppliers are distressed at the start of the game and do not have access to external sources of capital; hence, revenues from the buyer are crucial in determining whether default occurs. The production cost of each supplier is the sum of two stochastic components: a common term that is identical for both suppliers (representing raw materials costs, design specifications, etc.) and an idiosyncratic term that is unique to a given supplier (representing inherent firm capability). The buyer chooses a supplier and then decides on a single-or two-period contract. Comparing models with and without the possibility of default, we find that, without the possibility of supplier failure, the buyer always prefers short-term contracts over long-term contracts, whereas this preference is typically reversed in the presence of failure. Neither of these contracts coordinates the supply chain. We also consider dynamic contracts, in which the contract price is partially tied to some index representing the common component of production costs (e.g., commodity prices of raw materials such as steel or oil), allowing the buyer to shoulder some of the risk from cost uncertainty. We find that dynamic long-term contracts allow the buyer to coordinate the supply chain in the presence of default risk. We also demonstrate that our results continue to hold under a variety of alternative assumptions, including stochastic demand, allowing the buyer the option of subsidizing a bankrupt supplier via a contingent transfer payment or loan and allowing the buyer to unilaterally renegotiate contracts. We conclude that the possibility of supplier default offers a new reason to prefer long-term contracts over short-term contracts.