Market-based supplier selection with price, delivery time, and service level dependent demand

A market-based strategy is proposed for joint decisions on price, delivery time, service level, and supplier selection or investment. Product or service demand is modeled as a linear function of attributes including price, guaranteed delivery time, service level, or other quality-like performances and the profit is maximized as the objective. For different market segments or markets, market characteristics, namely customer sensitivity on attributes, differ. A supplier could be characterized by operation performance terms of cost, delivery time, service level, or quality. Results denote that operation characteristics of the supplier chosen should match market characteristics. Results show that, with stochastic delivery time, the service level is not always binding at the minimal value reserved by the manager or the market, which is assumed in the literature. There exists a limit on performance improvement due to cost increase, and there is a limit on cost reduction with decreased performance. Specifically, the less costly supplier must be chosen if the cost difference is more than one value, while the supplier with better performance must be chosen if the performance difference is more than another value. Those values are determined by current performance characteristics and market characteristics. The model is also applied in investment decision on cost reduction and delivery time reduction. There is a maximum value in spending to reduce delivery time and improve service level and quality. The model suggests that one firm could focus more on cost reduction or quality-like performance improvement based on market characteristics. The best market segment may exist for a firm with fixed operation performance. In one word, a firm′s operation characteristics and market characteristics must be matched for better profitability. Furthermore, concepts of lean manufacturing, emphasizing more on cost reduction, and flexible or agile manufacturing, emphasizing more on less delivery time or better service level, should be combined accordingly based on market characteristics.