Outsourcing through Competition: What is the Best Competition Parameter?

In this paper we consider a single buyer who wants to outsource the manufacturing of aproduct to N potential suppliers. The buyer’s objective is to maximize the service level shereceives from the suppliers. The suppliers compete for the buyer’s demand based on acompetition parameter which the buyer announces along with an allocation rule. We modeleach supplier as a make-to-stock queueing system. Using a simple proportional allocationfunction, we compare two competition parameters: service level and inventory level. Weshow that inventory competition creates a higher overall service level for the buyer. We alsoshow an optimal form of competition parameter which can induce the maximum feasibleservice level. Our base model shows the results for the competition between identicalsuppliers. We then extend the results to a case where the suppliers are heterogeneous.