Bidding for outsourcing contracts with capacity investments and cost asymmetry

Tarun Jain, Jishnu Hazra, T. C.E. Cheng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

1 Citation (Scopus)

Abstract

In this article, we consider a service supply chain where two vendor firms compete to win an information technology outsourcing contract from a client firm, which faces uncertain demand. The vendors’ variable operations costs are private information. The vendors also serve an external market with uncertain demand. After the award of the contract through bidding competition, vendors invest in capacity to meet their service requirements. We derive the optimal sourcing strategy for the client firm and the capacity investment decisions of the vendor firms. We characterise a threshold policy on the client’s outsourced requirements with respect to demand variability. We also observe that as the vendors’ mean cost increases, the requirements outsourced by the client firm decrease. In addition, we observe a threshold policy on the client’s outsourced requirements with respect to cost variability through numerical studies.

Original languageEnglish
JournalJournal of the Operational Research Society
DOIs
Publication statusAccepted/In press - 1 Jan 2019

Keywords

  • bidding
  • capacity investment
  • cost asymmetry
  • IT outsourcing
  • supply chain management
  • vendor selection

ASJC Scopus subject areas

  • Management Information Systems
  • Strategy and Management
  • Management Science and Operations Research
  • Marketing

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