Market-Based Supply Chain Coordination by Matching Suppliers' Cost Structures with Buyers' Order Profiles

Management Science · 2008 · Volume 54 · Issue 11

Abstract

We study competitive marketplaces with multiple suppliers and multiple buyers dealing with a single product. A buyer chooses the supplier who offers the best price for his order profile, as described by his order size and delivery frequency. A supplier's offering price reflects her logistic cost structure as captured by relevant economies of scale in a “setup cost” component, and storage- and distribution-related costs in a “holding cost per unit” component. We argue that the matching of buyers' order profiles to suppliers' cost structures is the main source of supply chain coordination benefit in this many-to-many supply chain. Such cost-effective matching can be achieved naturally through price competition among suppliers. We identify the segment of the buyer's order space that each supplier can win, and perform market share sensitivity analysis when a supplier's cost structure changes. The winning supplier, at the equilibrium of price competition, offers the lowest price of her closest competitor instead of the lowest price she can offer.

Keywords

coordination by lot sizing, coordination by matching, order space segment, pricing, equilibrium

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