Procurement competition in the presence of IoT-enabled B2B E-commerce

https://doi.org/10.1016/j.elerap.2021.101091Get rights and content

Highlights

  • We explore whether manufacturers give up traditional channel under B2B spot market.

  • Two risk-averse manufacturers engage a Cournot competition.

  • Manufacturers choose the optimal procurement strategy based on spot price variance.

  • The FN strategy may benefit the whole downstream manufacturers.

  • The FF subgame always benefits the whole supply chain.

Abstract

The Internet of things (IoT) has accelerated the development of e-commerce and enabled business-to-business (B2B) spot markets to emerge. This study considers a supply chain composed of one supplier and two manufacturers. Two manufacturers can procure raw materials from dual sources, that is, from a supplier with a forward contract or from a B2B spot market. Two manufacturers use raw materials to produce the final product and take part in Cournot competition in the final customer market. On the basis of the procurement strategies of two manufacturers, three competition structures exist between the manufacturers: (NN) both manufacturers procure raw materials only from a B2B spot market; (FN) one manufacturer procures raw materials from dual sources, namely, a forward contract and a B2B spot market, while the other manufacturer only obtains them from a B2B spot market; and (FF) both manufacturers procure raw materials from dual sources. We investigate which procurement strategy is better for manufacturers. Our study finds that the optimal setting is for manufacturers to procure raw materials from dual sources if and only if the spot price uncertainty exceeds a threshold value. Furthermore, the optimal wholesale price in the FN subgame is less than the price in the FF subgame. The optimal order quantity in the FF subgame is less than the quantity in the FN subgame. Whole downstream manufacturers can benefit from the FN strategy if the supplier’s risk aversion exceeds a threshold value. Meanwhile, the FF subgame always benefits the whole supply chain.

Introduction

In the last two decades, supply chain behavior has been significantly reshaped by information technology (Li et al., 2020, Zhang et al., 2020). Particularly, the Internet of things (IoT) has pulled in numerous opportunities and has extended supply chains. Moreover, e-commerce has been widely connected with IoT with the development of the Internet. One of the outcomes of the combination of e-commerce and IoT is the business-to-business (B2B) spot commodity market. A B2B spot commodity market has a significant growth not only in terms of trading volume and contract varieties but also in terms of liquidity (Dong and Liu, 2007). The emergence of B2B spot markets provides firms with a more flexible trading mode and helps these entities effectively manage their supply and demand risk (Grey and Olavson, 2005, Zhao et al., 2015). With a B2B spot market, the supply and demand can be adjusted to balance each other at a price equal to the spot price. A B2B spot market usually has a short lead time, and managers usually rely on this new procurement channel after demand information is observed. With the growing market liquidity, numerous raw materials and commodities, such as agricultural products, chemical products, metals, and plastics, are now widely transacted in B2B spot markets (Xing et al., 2012, Xing et al., 2014). In this study, we explore whether traditional procurement channel must still be maintained because B2B spot market procurement provide several advantages for risk-averse firms.

Different types of manufacturers use B2B spot markets in various ways. Numerous manufacturers use B2B spot markets as their second-sourcing procurement channel. They first procure their raw materials or commodities from the forward contract. When the demand and spot price are realized, they trade raw materials or commodities via a B2B spot market. For instance, Apple and Huawei both procure their DRAM card, a key component for mobile phones, from traditional forward contract and adjust their inventory in a B2B spot market (Ma et al., 2019). Canon and Nikon, two oligarchs of professional SLR cameras in Japan, usually procure normal-sized digital processing chips from a B2B spot market. They also procure these chips from an upstream supplier, NEC, in the off-season. However, several new or small manufacturers procure their raw materials or commodities only from B2B spot markets. They set the spot market as a unique procuring channel. For example, in the US beef industry, some beef packers procure fed cattle mainly via B2B spot markets (Boyabatli and Kleindorfer, 2011). Meanwhile, soybean-based product manufacturers in and around the major soybean growing areas of Northeast China usually trade soybean in B2B spot markets because these markets have been widespread.

B2B spot markets can effectively help firms to manage commodity inventory to control risk exposure. Several researchers have predicted that B2B spot markets will eventually replace forward contracts. However, numerous examples of the shortcomings of B2B spot markets clearly prove that signing contracts and long-term relationships with suppliers are beneficial in reality. The related literature has not adequately investigated the necessity of traditional procurement channels for risk-averse supply chain players under the presence of B2B spot markets and competition. Thus, our motivation for this study stems from our interest in addressing the following questions. Given dual sources, namely, the traditional forward contract and the B2B spot market, should manufacturers give up the traditional procurement source? Which procurement strategy is better for the upstream supplier and the downstream manufacturers under competitive circumstances? What is the impact of spot price volatility, demand volatility, capacity, correlation coefficient, and supply chain players’ risk aversion on their decisions and utilities?

To answer the above questions, this study considers a supply chain that consists of one risk-averse suppler and two risk-averse manufacturers. Two manufacturers use raw materials to produce the final product and take part in Cournot competition in the final customer market. These manufacturers have dual sources to procure raw materials. They can procure raw materials from the supplier with a traditional forward contract or from a B2B spot market. On the basis of the two manufacturers’ procurement sources, three competition structures exist between the manufacturers: (NN) both manufacturers procure raw materials only from a B2B spot market, (FN) one manufacturer procures raw materials from dual sources, that is, a forward contract and a B2B spot market, while another only obtains materials from a B2B spot market, and (FF) both manufacturers procure raw materials from the dual sources. We separately analyze three competition structures and obtain the optimal wholesale price for suppliers, the optimal procurement quantity for manufacturers, and the corresponding utility of three supply chain players. By comparing the results of the three structures, we gain the optimal procurement strategy for independent manufacturers, for the whole downstream manufacturers and for the whole supply chain.

This study provides a better understanding of the strategic procurement selection between the forward contract and the business-to-business (B2B) spot market in a two-stage supply chain under a competition scenario. Risk-averse manufacturers select the optimal procurement strategy based on spot price variance, which measures the uncertainty of the spot market. The two manufacturers are suggested to procure raw materials from dual sources if the spot price volatility is high, but otherwise forego the forward contract and only procure raw materials from the B2B spot market. The FN strategy can benefit all the downstream manufacturers if the supplier’s risk aversion exceeds a threshold value, while the FF strategy always benefits the supply chain. Thus, two manufacturers can cooperate to sign an ex-ante agreement, which stipulates that one manufacturer procures from dual sources while the other procures only from the spot market. One manufacturer should provide the other manufacturer with a monetary incentive to compensate for the profit loss brought by the unchanged strategy. Thus, this study provides suggestions for decision makers to set the wholesale price and procurement strategy according to important factors, such as spot price, demand variances, and the supply chain player’s attitude toward risks.

The remainder of this paper is organized as follows. We present the related literature in Section 2. In Section 3, we consider the basic problem. Then, in Section 4, we analyze the optimal wholesale price for the supplier, procurement, and production strategies for manufacturers under the NN, FN, and FF subgames, respectively. Next, we determine which strategy is better for supply chain players by comparing the optimal results in the three subgames in Section 5. We summarize the conclusions and practical implications and provide some opportunities for future research in Section 6.

Section snippets

Literature review

This study is related to two streams of literature: (1) procurement decisions of the B2B spot market; and (2) risk management of supply chain.

The model

We consider a supply chain composed of one suppler (she) and two manufacturers (A and B) with a fully liquid B2B spot market. Two manufacturers can procure raw materials through dual sources, through a supplier with a forward contract with price w, or through a B2B spot market with price s. Two manufacturers use raw materials to produce the final product and take part in Cournot competition in the final customer market. Specifically, given two manufacturers’ production quantities qi(i=A,B),

Equilibrium Analysis

In Section 4, we analyze the optimal wholesale price of the supplier, procurement, and production strategies of the manufacturers under the NN, FN and FF subgames, respectively. Under each of the subgame, we formulate a multi-stage game. Then, we solve each of the decision stage and characterize its equilibrium, starting at time T3 and going backwards.

Dual-sourcing or not? Comparisons and sensitivity analysis

In the above section, we have obtained the optimal solutions under the three different subgames in closed forms. Understanding which strategy is better for the supply chain players would provide useful guidelines for managers to manage risk in practice better. Furthermore, we also research the impact of the spot price uncertainty, demand uncertainty, and correlation coefficient on the optimal wholesale price, optimal order quantity, and supply chain members’ utilities under the three subgames.

Conclusions

We consider a supply chain that consists of one risk-averse suppler and two risk-averse manufacturers. Manufacturers can procure raw materials from dual sources, that is, from a supplier with a forward contract or from a B2B spot market. In the final customer market, the two manufacturers engage in Cournot competition. On the basis of the manufacturers’ procurement strategies, three competition subgames exist: (NN) both manufacturers procure raw materials only from the B2B spot market; (FN) one

Credit authorship contribution statement

Shanshan Ma: Conceptualization, Methodology, Writing - original draft, Formal analysis. Guo Li: Conceptualization, Writing - original draft, Supervision. Mengqi Liu: Formal analysis, Writing - review & editing.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgement

The authors thank the editors and anonymous reviewers for their constructive comments and suggestions which have significantly improved the paper. This research is supported by Ministry of Education, Humanities, and Social Sciences Research Project of China under Grant No. 20YJC630100; National Natural Science Foundation of China under Grant No. 72001143, 71971027, 71871091, 91746110, 72171079, and 71521002; Beijing Science and Technology Plan under the grant no. Z181100004118003; Beijing

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