Direct Sourcing or Agent Sourcing? Contract Negotiation in Procurement Outsourcing

AboutSectionsView PDF ToolsAdd to favoritesDownload CitationsTrack CitationsPermissionsReprints ShareShare onFacebookTwitterLinked InEmail Go to Section HomeManufacturing & Service Operations ManagementVol. 23, No. 2 Direct Sourcing or Agent Sourcing? Contract Negotiation in Procurement OutsourcingYulan Wang , Baozhuang Niu , Pengfei Guo , Jing-Sheng Song Yulan Wang , Baozhuang Niu , Pengfei Guo , Jing-Sheng Song Published Online:30 Mar 2020https://doi.org/10.1287/msom.2019.0843AbstractProblem definition: In a supply network consisting of a buyer, a purchasing agent, and a supplier, the buyer can procure the component from the supplier directly and rely on the purchasing agent for complementary services (named direct sourcing (DS)) or authorize the purchasing agent to conduct both procurement and complementary services (named agent sourcing (AS)). When parties bargain pairwisely, how do their bargaining powers influence the equilibrium procurement outsourcing structure? Academic/practical relevance: Both outsourcing structures, DS and AS are commonly observed in practice, whereas the literature has rarely answered the questions that we ask. Methodology: We adopt the generalized Nash bargaining framework to model the negotiations among the parties and derive the corresponding equilibrium outcomes under both outsourcing structures by taking into consideration the existence of a component spot market. Results: When two parties negotiate directly, we define their direct negotiation coefficient as the ratio of their exogenous bilateral relative bargaining powers. If they negotiate indirectly through a third party, we define their indirect negotiation coefficient as the quotient of their respective direct negotiation coefficients with respect to the third party. We show that when parties negotiate over both wholesale prices and quantities, the buyer’s preference for DS and AS solely depends on the comparison result of the buyer’s direct negotiation coefficient versus the indirect one with respect to the supplier. When the quantity is determined by the buyer and parties negotiate over wholesale prices, the equilibrium outsourcing structure hinges critically upon the magnitude of the purchasing agent’s relative bargaining power over the supplier. Interestingly, the preferences of the three parties for DS and AS may be aligned with each other. We also show that it is in the best interest of the buyer to negotiate prices only. Managerial implications: Our research identifies the endogenous bargaining powers among parties that dictate the equilibrium outsourcing structure. It indicates that the buyer needs to adjust procurement outsourcing decisions accordingly when the bargaining powers of the buyer’s upstream partners are altered, especially when the buyer’s bargaining power is sufficiently large: we analytically show that the buyer’s preference is very sensitive to the relative bargaining powers of the purchasing agent and the supplier. This might help explain why Walmart switched from AS with Li & Fung to DS within just three years. Previous Back to Top Next FiguresReferencesRelatedInformationCited byThe Role of Retail Information Link in MNF's Coordination of Profit and Social Welfare via Procurement OutsourcingIEEE Transactions on Engineering Management, Vol. 70, No. 3How to outsource production considering quality management: Turnkey or buy-sell?Omega, Vol. 113Negotiations in Competing Supply Chains: The Kalai-Smorodinsky Bargaining SolutionQi Feng, Yuanchen Li, J. 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George Shanthikumar16 August 2021 | Management Science, Vol. 68, No. 4Strategic sourcing selection for bike-sharing rebalancing: An evolutionary game approachTransportation Research Part E: Logistics and Transportation Review, Vol. 156“Production + procurement” outsourcing with competitive contract manufacturer's partial learning and supplier's price discrimination14 November 2020 | International Transactions in Operational Research, Vol. 28, No. 4Information advantage and payment disadvantage when selling goods through a powerful retailer4 January 2021 | Annals of Operations Research, Vol. 164Optimal bargaining timing of a wholesale price for a manufacturer with a retailer in a dual-channel supply chainEuropean Journal of Operational Research, Vol. 287, No. 1Sustainable efforts, procurement outsourcing, and channel co-opetition in emerging marketsTransportation Research Part E: Logistics and Transportation Review, Vol. 138Coordinating Project Outsourcing through Bilateral Contract NegotiationsSSRN Electronic Journal, Vol. 15Competitive Revenue Management with Sequential BargainingSSRN Electronic Journal, Vol. 43 Volume 23, Issue 2March–April 2021Pages 267-545, C2 Article Information Supplemental Materials Metrics Information Received:April 09, 2015Accepted:June 21, 2019Published Online:March 30, 2020 Copyright © 2020, INFORMSCite asYulan Wang, Baozhuang Niu, Pengfei Guo, Jing-Sheng Song, (2020) Direct Sourcing or Agent Sourcing? Contract Negotiation in Procurement Outsourcing. Manufacturing & Service Operations Management 23(2):294-310. https://doi.org/10.1287/msom.2019.0843 Keywordsprocurement outsourcingpurchasing agentdirect sourcingagent sourcingnegotiationPDF download