Procurement Control against Supply Chain Upstream Risk and Inefficiency

Procurement control (PC) is a practice that the buyer controls the material procurement of the supplier and at the same time takes the inventory risk from the supplier. In this paper we compare PC with a decentralized contracting practice (DC) in the setting of a risk-neutral buyer cooperating with a risk-averse supplier under information asymmetry, upstream raw material price volatility, and downstream demand uncertainty. Then, we provide a sufficient condition for PC to achieve a Pareto Improvement, and find that, the benefit of implementing PC increases with the raw material price level, supplier’s risk-averse degree, and material price variance, but decreases with market demand expectation. Since information asymmetry will disappear and business independence will be weakened under PC, suppliers normally worry about the maintenance of their profitability. We thus discuss some necessary conditions for suppliers to accept PC and offer an explanation for the industry practice in China regarding PC at the end of our paper