Lee, Khai Sheang and Hean, Tat Keh and Tuck , Siong Chung
(2000)
Single Versus Multiple
Source Purchasing Strategy.
Asian Academy of Management Journal (AAMJ), 5 (1).
pp. 1-18.
ISSN 1394-2603
Abstract
In this paper, we look at the choice between a single and a multiple source purchasing
strategy. Using a game theoretic approach, we examine the impact of the economies of
scale and specific knowledge on the choice of sourcing strategy, explicitly taking into
account the small numbers interactions involving a buyer and two competing suppliers.
We show that economies of scale and specific knowledge have opposing effects on
sourcing strategies. While a single source strategy is favored when efficiency gains due
to economies of scale are large, a multiple source strategy is the dominant strategy in
the long run when specific knowledge acquired by a supplier becomes substantial. In
following a multiple source strategy, it is also optimal for a buyer to split the supply
contract symmetrically across the suppliers, in order to appropriate all efficiency gains
that result from the acquisition of specific knowledge by its suppliers. However,
splitting of the supply contract results in a reduction in gains due to the economies of
scale.
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