Three Essays on Managing Competitive Bid Procurement.

Abstract

Procurement has emerged as a critical function, yet a challenging topic, since in many firms procurement operations are complex, and laced with misaligned incentives and information asymmetry between buyers and suppliers. This dissertation explores three different contexts that arise from a buyer’s lack of information.

The first essay explores the value of cost modeling in competitive bid procurement, to understand if, how and when cost modeling should be deployed. I show that although bid competition sometimes duplicates the information gleaned by cost modeling, the latter can still be beneficial when it helps the buyer set an effective reserve price. Then I analyze how the buyer can gain the most benefit through cost modeling. Specifically, I characterize which supplier(s) to learn about, which portion(s) of the costs to learn, and how deeply and broadly the buyer should learn for general supply base topologies.

The second essay studies the problem that a buyer's request for quotes (RFQ) contains an error that triggers re-design and associated supplier windfall profit. Surprisingly, I find that RFQ error encourages suppliers to submit lower bids with anticipation of future windfall profit. I also find that supplier disparity in error-detecting expertise generally hurts the buyer. Furthermore, I propose a "pre-pay" and “error-bounty” approach to stem supplier windfall profit and induce knowledgeable suppliers to divulge the existence of RFQ error.

The third essay considers whether a buyer should exclude or include an incumbent supplier in the auction. Excluding the incumbent allows the buyer to set an aggressive reserve price while including the incumbent in the auction drums up competition with one more bidder. I find that the buyer’s decision depends on the incumbent’s and entrants’ cost distributions: When the incumbent’s cost is expected to be substantially different from the entrants’ (either much lower or much higher) and has low uncertainty, excluding the incumbent is the better option; Conversely, when the incumbent’s cost is comparable to the entrants’ and has similar amount of uncertainty, the buyer prefers inviting the incumbent to the auction.