Supply Chain Intermediation When Retailers Lead

Date, Time, Venue

28 Feb 2012, Tuesday at 15.15

Room 2.10 in the Engineering Front Building University College London

Abstract

Our objective is to shed some light over the recent success of supply chain intermediation firms such as the Alibaba Group and Li & Fung. To better understand the role of these firms, we propose a model of competition in a three-tier supply chain, where the middle tier consists of a set of intermediaries who compete to mediate between competing retailers and capacity-constrained suppliers. Unlike most existing models, our model portrays the retailers as Stackelberg leaders with respect to the intermediaries, which we argue is a more realistic representation of supply chain intermediation. We characterize the competitive equilibrium in closed form for the symmetric supply chain, and use the closed-form expressions to derive a number of insights. First, we find that intermediaries should focus on products for which the supplier base available is neither too narrow nor too broad; that is, intermediaries should avoid specialty as well as commodity products. Second, we find that the existence of intermediaries does not necessarily result in supply chain inefficiency, but rather that efficiency can be achieved provided that there is the right balance of competition at different tiers in the supply chain. Finally, we characterize the set of circumstances under which retailers benefit from using intermediation services, and show that these include situations where it is costly for retailers to identify suitable suppliers, and where intermediaries are more efficient than retailers at validating supplier quality.