Services outsourcing under asymmetric cost information

From the client firm's perspective, for the case when the open market demand distribution is Uniform and the buyer's demand is Normally distributed, we analytically derive the capacity to be procured as well as and the optimal number of vendors to be awarded the contract. Our analysis reveals that with an increase in vendor base cost heterogeneity, the optimum number of required vendors decreases. We further conclude that when the mean demand of the client firm is below a threshold value, then as the client firm's demand variability increases, the optimal number of vendors increases. Whereas, in case the client firm's mean demand is above the threshold value, then the optimal size of vendor base decreases as the client firm's demand variability increases.