A procurement model in an electronic market with coordination costs

Abstract

Electronic markets provide an alternative channel for industrial procurement. Some argue that number of suppliers selected for award of contract could increase several others predicted that the number of suppliers will be fewer. We investigate this issue by modeling the procurement process in an electronic market. Our results show that inclusion of coordination costs in the analysis is significant in the decision-making framework. We find that variations in supplier capacities do not significantly affect the optimum number of suppliers when there are costs of coordination. Furthermore, we also show that managers do not gain much by pre-qualifying a large pool of suppliers to participate in the procurement process.