Supplier Selection via Tournaments

I this paper, we study the performance of a sourcing mechanism gaining popularity in industrial procurement environments; a tournament. Under a tournament, a buyer initially procures her parts from two suppliers with possibly different quality levels, for T time periods, i.e., she parallel sources. During this time, the buyer is able to observe noisy signals about the suppliers’ quality. At time T, she selects the supplier with the highest observed performance and awards it the remainder of her business. We characterize the optimal duration of the tournament as a function of various market parameters, including information and investment costs. Furthermore, we demonstrate that a tournament can be more profitable for the buyer than selecting the highest quality supplier at time T 0 and sole sourcing entirely.