SourcingStrategies Web

Sourcing Strategies and Supplier Incentives for Short Life-Cycle Goods
Eduard Calvo • Victor Mart´ınez-de-Alb´eniz
IESE Business School, University of Navarra, Av. Pearson 21, 08034 Barcelona, Spain [e-mail] • [e-mail]
Abstract
Multiple sourcing with quick response has been recognized as a useful tool to manage demand risk for short life-cycle goods. However, general wisdom has traditionally ignored the effect of these practices on supplier incentives. In this paper we find that when suppliers take pricing decisions, dual sourcing does not always lead to higher supply chain efficiency or buyer profits as compared to single sourcing.
Specifically, it leads to higher price quotes from suppliers, because more expensive suppliers will still receive part of the business if they are sufficiently quick. In other words, the effects of double marginalization may offset the potential increase in supply chain profit due to higher ordering flexibility. We find that this occurs when suppliers have very different cost structures, and when the reduction in demand uncertainty due to quick response is low.
Submitted: February 9, 2012.
Keywords: dual sourcing, double marginalization, supplier competition.

1.

Introduction

In many industries such as apparel or electronics, the duration of a product in the point of sales has been reduced significantly in recent times. For example, the collection-based cycle in apparel, where firms launched Fall-Winter and Spring-Summer product catalogues, has evolved into a continuous release of products in the store which do not stay in the assortment for long. Such trend is driven by fast fashion retailers such as Inditex or H&M, see Caro and Mart´ınez-de-Alb´eniz (2009). Similarly, electronics is suffering for a similar evolution although in this case the renewal of products is driven by technology innovation. Unfortunately, when products have a short life-cycle it becomes difficult to manage them operationally for many reasons:

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