Market-Based Supply Chain Coordination by Matching Suppliers' Cost Structures with Buyers' Order Profiles

We study a competitive supply marketplace where multiple suppliers offer a single nondifferentiated product to multiple buyers. Within this multi-supplier, multi-buyer marketplace, each buyer chooses the supply partner that serves the buyer’s order profile, described by his order size and delivery frequency, with the best price. Suppliers differ from each other in terms of their logistic cost structures, as captured by relevant economies of scale in a “setup cost” component, and storage, distribution and working capital related costs in a “holding cost per unit”. A supplier’s offering price to a buyer depends on how well the supplier’s cost structure matches the buyer’s order profile, as well as the prices potentially offered by her competing suppliers. In this paper, we argue that the matching between buyers’ order profiles and suppliers’ cost structures represents the main source of supply chain coordination benefits in the manyto-many supply chain with economies of scale. We show that the most cost effective matching can be naturally achieved through price competition among the suppliers. Our analysis identifies the segment of the order space each supplier could win by taking advantages of her logistic cost structure. At the equilibrium of price competition, the winning supplier does not offer the lowest price she can offer, but instead she offers the lowest price of her closest competitor. We perform market share sensitivity analysis when a supplier’s logistic cost structure changes or when a new supplier enters the market. Finally, we suggest to implement such market-based cost effective matching through either a reverse auction mechanism or a logistic intermediary.