Simultaneously Managing Procurement Costs and Risks.

Abstract

The average US manufacturer spends 40-60% of its revenue to procure goods and services. Transcending its more tactical beginnings in vertically integrated firms, today the procurement function serves as a vital gatekeeper to low-cost and low-risk inputs for a firm. Strategic procurement involves operational processes such as supplier qualification screening to identify capable suppliers and also economic processes such as auctions and mechanism design to negotiate terms and prices with suppliers. Reflecting these challenges, the dissertation research studies how companies can simultaneously manage procurement costs and risks.

The dissertation consists of three essays. The first essay adopts an optimal mechanism analysis to study how a buyer can best use a reverse auction in combination with supplier qualification screening processes to determine which qualified new supplier to contract with. The main takeaway for practitioners is that the standard industrial practice of fully qualifying all suppliers before the auction can be improved upon by judiciously delaying all or part of the qualification screening process until after the auction. The second essay extends the insights of the first essay to a setting where a buyer conducts an auction with her qualified incumbent supplier and a possibly unqualified entrant, and shows that the incumbent will strategically drop out of the auction early to forestall a bidding war if the buyer delays the entrant's qualification screening until after the auction. The third essay examines how a buyer can choose suppliers from different geographic regions to mitigate region-specific cost shocks to ``non-price costs" covering logistics, tariffs, shipping insurance and commissions. It shows that the buyer's optimal diversification decision depends on her degree of bargaining clout, i.e., her ability to impose auction mechanisms to curtail suppliers' windfall profit-taking. The more bargaining power the buyer has, the more she prefers a diversified supply base.