Inventory, Speculation, and Sourcing Strategies in the Presence of Online Exchanges

In this paper we study how online B2B exchanges affect buyer-supplier relationships where the exchange takes the role of a secondary market in which buyers (of the initial product) can trade excess inventory to address supply and demand imbalances. Businessto-Business (B2B) exchanges such as Converge for electronic parts, Aeroxchange for avionics, and Eurecat for Chemical catalysts, have attempted over the last several years to provide supply for storable industrial goods with some degree of design specification (as opposed to undifferentiated commodities). Through this research we elucidate some aspects of how speculative online exchanges with a small number of participants, as in the examples just mentioned, might behave and the impact they will have on the use of long term contracts for supply. Our model endogenizes the dynamic evolution of spot prices in response to buyers’ and their supplier’s actions, and explicitly models a strategic supplier who acts as a Stackelberg leader in a supply-procurement game. The model thus addresses essential features of spot markets for industrial storable goods so far ignored in the literature. By endogenizing the spot market price evolution, we demonstrate the highly erratic and peaking behavior of spot prices in online markets with few participants. Within our endogenized market, we show that participating buyers accrue network benefits as the number of participating firms increases through the inventory pooling effects, resulting in reduced costs for them. However, a strategically acting supplier will counteract such benefits by restricting availability of goods to the spot market, sacrificing short term spot market revenue for long term contract volume. This increases the procurement risk profile for a buyer reliant upon them, thus increasing the attractiveness of long term contracting arrangements. We conclude that a large percentage of market demand for the industrial goods studied will continue to be provided through long term contracts, and only shortterm supply-demand imbalances will be resolved through speculative online exchanges.