We consider a supply chain with one buyer and multiple suppliers, who are subject to disruptions and whose likelihoods of disruption are their private information. In such setting, should the buyer procure directly from the suppliers or engage services of a better-informed procurement service provider (PSP)?
Conventional wisdom says that hiring a PSP is always the right choice, because the PSP’s knowledge of the supply base improves supplier selection and management. On the other hand, when using a PSP, the buyer adds another layer to its supply chain, potentially introducing double-marginalization costs and relinquishing control over procurement and supply-risk management.
Earlier studies prove that using a PSP purely for its superior knowledge about supply costs is always worse for a buyer than contracting with the suppliers directly. Our answer to this research question is more nuanced. Contrary to the findings of the earlier studies, the buyer may benefit from using a PSP.
We identify, quantify, and explain all of the benefits and the costs of using a PSP, and describe conditions under which benefits exceed the costs. We explain that the positive value of using a PSP is derived from the reduction of informational costs and decreased supply risk. We show that the negative value of using a PSP comes from the loss of direct control over the supplier’s production actions, from the PSP facilitating implicit supplier collusion, and from the increased supply risk. These results highlight the interplay between contracting, asymmetric information, and risk managemen