Using Procurement Service Providers in Supplier Screening

Wan, Z and Devalkar, S K (2014) Using Procurement Service Providers in Supplier Screening. Working Paper. SSRN.

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A buyer engages a procurement service provider (PSP) to short-list pre-screened suppliers for final selection. The PSP can exert costly effort to include promising candidates that have a higher probability to be deemed qualified by the buyer. The buyer optimizes two key decision variables in her contract with the PSP: the short-list size and the performance bonus. We solve a mixed-integer program to characterize the optimal solution and provide a fast algorithm to compute the optimal decisions. We find that the number of candidates short-listed and the PSP's effort are substitutes in the sense that they both increase the probability of the buyer finding a qualified supplier. The buyer prefers to offer a performance bonus if and only if the fixed fees are sufficiently high. We also find that when the buyer has the choice to re-engage the PSP until finding a qualified supplier, the buyer may still prefer a single engagement when using a performance bonus. These managerial insights are robust when the buyer seeks multiple qualified suppliers to form a supply base.

Item Type: Monograph (Working Paper)
Subjects: Operations Management > Product Development
Operations Management > Supply Chain Management
Date Deposited: 01 Apr 2019 10:13
Last Modified: 01 Apr 2019 10:13

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