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TITLE: A Behavioral Investigation of Service-Based Supplier Competitions

AUTHORS: Karen Donohue


The incidence of outsourcing has increased substantially in the last five years, increasing the frequency that supplier selection and allocation decisions are made. The criterion for selecting outsourcing partners is also becoming more complex and multi-dimensional. Outsourcing decisions are increasingly based on the quality of service (e.g., fill-rate or response time) offered by potential suppliers, as other dimensions, such price and product quality, become more uniform across companies. In this talk, we will examine how a buyer should outsource demand across competing suppliers to optimize the level of service he receives across his supply base. We consider two competitive schemes that the buyer might offer: (1) supplier-allocation (SA), where suppliers compete for a proportion of the buyer's demand, with the proportion each supplier receives increasing in the quality of service she offers, and (2) supplier-selection (SS), where suppliers compete for the probability of winning the entire market, with the probability of winning increasing in the quality of service a supplier offers. We analyze the suppliers’ “theoretical” reactions to each scheme using a series of analytical models. We also test the robustness of our theoretical findings by performing a series of laboratory experiments with human subjects taking part in the supplier competition. We find the human subjects are more aggressive in their service investments, and more sensitive to the type of competition offered, than theory would suggest.

This research is joint work with Professor Saif Benjaafar and PhD student Ehsan Elahi, ME/IE Department, University of Minnesota, and Elena Katok at Penn State University.


Karen Donohue is an Associate Professor of Operations and Management Science at the Carlson School of Management, University of Minnesota. She also holds a secondary appointment within the Mechanical Engineering department of the Institute of Technology. She joined the Carlson School in 2000, after serving six years on the faculty of the Wharton School. Professor Donohue's research focuses on coordination, competition, and behavioral issues impacting supply chain management. Sponsors of her research include Best Buy, Motorola, NSF, Sandia National Laboratory, and the US Navy. She holds a MS and PhD in Industrial Engineering from Northwestern University, and a BA in Mathematics & Economics from St. Olaf College.