Assuring Available Production Capacity During Supply Channel Selection

Abstract

Choosing a supply channel amounts to choosing the limits of a new product’s profitability. However, organizations may not have sufficient information to choose upstream supply chain partners optimally. We consider an original equipment manufacturer (OEM) outsourcing production of a new make-to-order product to a pre-qualified contract manufacturer. In addition, the contract manufacturer may select his own supplier for a key component of the OEM’s product. We show that competition gives profit maximizing firms an incentive to misreport available production capacity. We then devise request for quotation (RFQ) design strategies that induce firms to credibly relay supply channel capacity information.