When sourcing through a procurement service provider (PSP), the PSP often collects rebates from unethical manufacturers in developing countries (as referral fees) that are “hidden” from the retailers. Further analysis is required to recognize if a PSP has a strong incentive to solicit quotes from unethical manufacturers.

Recently, Assistant Professor Xiaoshuai Fan from the Department of Information System and Management Engineering at the Southern University of Science and Technology (SUSTech) published a paper to examine a situation in which the retailer insists on soliciting a quote from a manufacturer designated by the retailer and a separate quote from an unethical manufacturer selected by the PSP.

Her paper, entitled “Mechanism Design for Managing Hidden Rebates and Inflated Quotes of a Procurement Service Provider,” was published in the journal Manufacturing & Service Operations Management.

This paper studies the problem of kickbacks from dishonest suppliers in the procurement supply chain. A common problem in the procurement supply chain is that the interests of intermediaries and retailers do not converge due to kickbacks.  The optimal deterministic incentive compatibility mechanism and the effective random incentive compatibility mechanism are proposed to help retailers reveal intermediaries’ private information, reduce the probability of hidden rebates, and reduce the procurement cost of retailers.  At the theoretical level, it breaks through the difficulty in solving the multi-dimensional mechanism design problem.

In the agency problem of the multi-echelon supply chain, the intermediaries have multi-dimensional private information, including the quotation information of multiple suppliers, the number of rebates, and the honesty of suppliers. Driven by financial interests, intermediaries have incentives to falsify information to help dishonest suppliers win contracts.  

Mechanism design under multi-dimensional private information is always a complex problem in the academic field.  To disclose the private information of intermediaries, the research team constructed a nonlinear payment scheme and allocation rule. By balancing the allocation efficiency and the compensation, the authors find an incentive compatibility mechanism under multi-dimensional private information.  In addition, they extended the research to proportional rebates and found that the design of incentive compatibility mechanism would be more complicated when suppliers pay proportionate rebates.

Assistant Professor Xiaoshuai Fan is the first author of this paper. This study was a collaborative effort, which included Professor Ying-Ju Chen from the Hong Kong University of Science and Technology (HKUST) and Professor Christopher Tang from the University of California, Los Angeles (UCLA).

Assistant Professor Xiaoshuai Fan’s primary expertise focuses on mechanism design and auction theory under information asymmetry, sustainable operations management (poverty, income disparity, carbon emissions), behavioral operations, supply chain management, etc. 

Paper link: https://doi.org/10.1287/msom.2020.0885

To read all stories about SUSTech science, subscribe to the monthly SUSTech Newsletter.