Abstract of the dissertation

Abstract of the dissertation

Supplier Selection: Volume Consolidation, Risks, and Incentive Issues

Consolidating purchasing volumes has become an important strategy for firms in their pursuit of lower purchasing cost. However, this strategy also entails significant operational problems and potential financial drawbacks. First, consolidation to one supplier leaves a firm vulnerable to supply disruptions. Based on a formal model, the first essay in this thesis evaluates the essential trade-off between consolidation benefits and financial consequences of disruptions. Conventional supplier strategies are critically reviewed, and in part counterintuitive recommendations for single/dual sourcing strategies are developed.

Second, firms often establish frame contracts with one supplier to consolidate volume and reap economies of scale. However, this strategy entails behavioral and incentive problems within a purchasing organization. A firm's frame contract compliance and the associated benefits are hindered by maverick buying (MB), i.e. the off-contract buying by individual purchasing agents within the organization. In the second essay, a formal model is presented that characterizes the root cause of MB, its performance impact, and the effect of commonly applied mitigation methods. One important result is that full compliance is not necessarily efficient. The third essay builds on this finding and proposes an alternative approach in dealing with MB. This approach improves a firm's earnings by participating in MB.