Information Technology, Incentives, and the Optimal Number of Suppliers.

Author List: Bakos, J. Yannis; Brynjolfsson, Erik;
Journal of Management Information Systems, 1993, Volume 10, Issue 2, Page 37-53.
Buyers are transforming their relationships with suppliers. For example, instead of playing off dozens or even hundreds of competing suppliers against one another, many firms are finding it more profitable to work closely with only a small number of "partners." In this paper we explore some causes and consequences of this transformation. We apply the economic theory of incomplete contracts to determine the optimal strategy for a buyer. We find that the buyer firm will often maximize profits by limiting its options and reducing its own bargaining power. This may seem paradoxical in an age of cheap communications costs and aggressive competition. However, unlike earlier models that focused on coordination costs, we focus on the critical importance of providing incentives for suppliers. Our results spring from the need to make it worthwhile for suppliers to invest in "noncontractibles" such as innovation, responsiveness, and information sharing. Such incentives will often be stronger when the number of competing suppliers is small. The findings of the theoretical models appear to be consistent with observations from empirical research which highlight the key role of information technology in enabling this transformation.
Keywords: buyer-supplier relationships; incomplete contracts; intercorporate coordination; interorganizational systems; outsourcing
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#52 0.216 supply chain information suppliers supplier partners relationships integration use chains technology interorganizational sharing systems procurement buyer interfirm coordination enterprises flexibility
#242 0.130 market competition competitive network markets firms products competing competitor differentiation advantage competitors presence dominant structure share using incumbent make important
#35 0.106 technology organizational information organizations organization new work perspective innovation processes used technological understanding technologies transformation consequences perspectives use administrative economic
#70 0.098 contract contracts incentives incentive outsourcing hazard moral contracting agency contractual asymmetry incomplete set cost client parties examine effort structures double
#271 0.087 technology investments investment information firm firms profitability value performance impact data higher evidence diversification industry payoff return findings decisions greater
#17 0.086 empirical model relationships causal framework theoretical construct results models terms paper relationship based argue proposed literature issues assumptions provide suggest
#97 0.086 set approach algorithm optimal used develop results use simulation experiments algorithms demonstrate proposed optimization present analytical distribution selection number existing