Procurement for Assembly Systems Under Supply Uncertainty: Optimal Mechanisms

Designing Effective Procurement Mechanisms for Assembly Systems Under Supply Uncertainty In their paper “Procurement for Assembly Systems Under Supply Uncertainty: Optimal Mechanisms,” Like Bu, Milind Dawande, and Ganesh Janakiraman explore how manufacturers can effectively source components when suppliers face uncertain yields and possess private information about their production costs. Such challenges are common in industries such as electronics and automotive manufacturing, in which a shortage of a single part can halt the entire assembly line. The authors develop an optimal procurement mechanism that helps manufacturers decide how much to source from each supplier and how to structure payments contingent on uncertain delivery quantities when suppliers’ production efforts cannot be directly observed. Their analysis reveals a practical menu-based contract under which each supplier selects terms best suited to its situation and the manufacturer subsequently determines order quantities for each component. The study provides both theoretical insights and actionable guidance for managing complex supply relationships in uncertain environments.