Supplier selection model with incomplete cost information

Abstract

We analyze a scenario where a buyer procures capacity from one or more suppliers in the presence of demand uncertainty. The buyer does not have information of suppliers' production cost function but assumes it is sampled from a known probability distribution. The supplier, of course, has knowledge of its own cost function but like the buyer does not have information on other suppliers' cost function. Under this scenario we explicitly derive suppliers' capacity reservation price, which is a function of their capacity, amount of capacity reserved by the buyer and other parameters. The buyer's decisions are how much capacity to reserve and from how many suppliers. Under certain conditions we develop solutions and show that the model is robust to the number of suppliers from whom capacity is procured through reservation. When the parameters of demand distribution changes the supply base is likely to remain more or less the same.