Evaluation of strategies for repeat procurement
Held, Christopher M.
MetadataShow full item record
For the past several decades, there has been a fundamental dispute between the appropriate mechanism for repeat procurement. On one hand, the supporters of Porter (1979) advocate a competitive setting where short-term contracts are used to increase buyer power and lower supplier prices. On the other hand, the supporters of Deming (1986) advocate the idea of long-term contracts to align buyer and supplier incentives. This trade-off between long-term and short-term contracts has fundamentally affected the practice of procurement, with most suppliers opting for hybrid strategies such as Incumbent Biasing: a strategy characterized by short-term contracts with frequent rebidding with an advantage given to the incumbent. This work examines this hybrid strategy to determine its effectiveness. First, we create an empirical model that identifies and measures the trade-offs between the Porter and Deming strategies. Using this model, we find that Incumbent Biasing has an impact on procurement performance via two mechanisms: first, Incumbent Biasing decreases bidding competitiveness in repeat procurement bidding, which decreases performance; second, Incumbent Biasing has a moderating effect where it improves incentive alignment between the buyer and supplier and improves procurement performance. We show that depending on the current contract design, the net effect of Incumbent Biasing on overall procurement performance can be either positive or negative. This is first work to empirically test the impact of Incumbent Biasing on procurement performance and the first to identify the positive and negative mechanisms by which this impact occurs. Using this research, managers will be able to identify their firm's position with regards to incentive alignment with their supplier to determine if Incumbent Biasing has a net positive effect for their firm. After identifying the impact of Incumbent Biasing on procurement performance, we contribute to the literature by testing this analysis through two additional extensions. First, using secondary data analysis we show that our construct for procurement performance is correlated with firm performance. We do this by comparing the answers to our procurement performance construct items to the change in gross margin of the publicly traded respondents in our study over time. This shows that our construct is not only reliable, but that procurement performance has a positive impact on overall firm performance. This is the first work to provide an empirical construct for procurement performance that is validated via secondary data analysis of firm performance. Second, we test a competing theory to Incumbent Biasing which is Multi-Sourcing: the strategy of spreading a contract to multiple suppliers to maintain competitiveness in bidding. Approximately $46\%$ of our sample identify as using both strategies simultaneously and we test for an impact between the two. We show that the two strategies to not impact each other and can be viewed independently. Subsequently, we test two Multi-Sourcing constructs in our model and find that there is no significant impact on bidding competitiveness from Multi-Sourcing. Subsequently, we examine the impact of repeatedly awarding a contract to a pool of bidders. In our model, one contract is bid repeatedly over time, resulting in bidders gaining information about their competitors' cost. The academic literature is mixed on how a buyer should approach this type of contract bidding interaction. On one hand, it is argued that establishing an awarding structure that favors the incumbent decreases the frequency of switching, and thus cost. On the other hand, it is argued that an awarding structure that favors the non-incumbent (entrant) bidders places competitive pressure on the incumbent and generates low margin bids. This issue is further complicated by the practice cited in the academic literature of ``defection', where entrant firms either perceive a bias or believe that their cost is uncompetitive and will not bid in future stages. We create a framework that explores the apparent contradictions in these recommendations and gives conditions when biasing toward the incumbent or entrant should be implemented. We first characterize bidders based on their effort to bid and their cost to supply the contract. We then show that in the case of low effort to bid and high cost for the entrant, entrant biasing is optimal; when the reverse is true incumbent biasing is optimal. Using the results from our analysis, we provide guidance to buyers facing a repeated procurement