Procurement is an important part of a business. Whether it can deliver high-quality products and services can be described as the provider’s "most important competitiveness". In the social economy, many providers have such competitiveness precisely because they have gained experience over a long period of time.

For example, software development providers use their practical experience to continuously improve software development processes and code quality, thereby increasing development speed and customer satisfaction; logistics providers use their practical experience to optimize transport routes and improve warehousing, thereby increasing the efficiency of logistics and the quality of transport services.

This long-term accumulation of learning experiences and "learning by doing" helps providers to better grasp their own production and service advantages and thus obtain "superior cost information."

"Learning by doing" is already widely used to improve suppliers’ capabilities, but ZHANG Wei, a researcher in the Hundred Talents Program of Zhejiang University School of Management, together with the team have found that if suppliers are unable to learn from practice, it may harm buyers’ interests.

Recently, ZHANG Wei, a researcher of the "Hundred Talents Program" from the Department of Service Science and Operations Management, School of Management, Zhejiang University, together with the team published an article “The Strategic Role of Supplier Learning” in the top international journal MANUFACTURING & SERVICE OPERATIONS MANAGEMENT (UTD 24 journal).

You can read the original paper  here 

How is it that “learning by doing" helps suppliers to optimize procurement contracts? Why does "learning by doing" for suppliers have "disadvantages" for buyers? How can this research support suppliers’ management practices with expertise?

In the social economy, providers are constantly learning, gaining experience and acquiring knowledge as they produce products and offer services. The increase in overall knowledge will help improve providers’ production efficiency and enhance their service quality.

ZHANG Wei and his team realized that "knowledge accumulation" and "knowledge externalities" are not only important for suppliers to improve their own capabilities and solve crises in the supply chain, but also have important guidance value for the design of procurement contracts.

Researchers first looked at the shortage of generic drug supply in the United States. They found that there are many attempts to alleviate drug shortages from an economic perspective, such as signing long-term contracts and fixing prices and purchase quantities in procurement contracts to encourage manufacturers to invest and optimize production to increase supply capacity. These attempts derive from the optimization of procurement contracts, and it is the accumulation of experience in "learning by doing" that provides guidance for contract optimization.

Similarly, predicting procurement costs and optimizing procurement contracts can enable suppliers to ensure stable supply, reduce production and price risks, ease financial pressure, and thus enter high-value markets.

ZHANG Wei and his team have found that the accumulation of production experience can have an impact on the design of suppliers’ procurement contracts. However, there is no specific theory in previous research that proves the role of suppliers’ "learning by doing" in optimizing procurement contracts. Therefore, they addressed this issue and conducted a thorough investigation.

In the initial phase of their research, ZHANG Wei and his team focused on the importance of suppliers’ "learning by doing" in optimizing procurement contracts. Upon further investigation, they found that suppliers’ "learning by doing” can be detrimental to buyers’ interests.

So how does “learning by doing” optimize procurement contracts? And why does this change affect buyers?

Use the theory of dynamic mechanisms to describe optimal procurement contracts

ZHANG Wei’s team found that in the previous design of procurement contracts, the supplier’s cost information was often assumed to be "fixed". In reality, however, the cost data changed dynamically. For this reason, the scientific research team applied the theory of dynamic mechanisms and developed a "multi-period model" to design an optimal procurement contract.

The research results show that suppliers’ cost information changes with purchasing volume, production capacity and other factors. These factors are influenced by "learning by doing". As production volume increases and production capacity is improved, costs decrease.

If suppliers can estimate their own production costs and profit margins more accurately, they can better evaluate and design procurement contracts and thus achieve " benefit maximization ". from this, the scientific research team concluded that we can only help suppliers design the "optimal procurement contract" if we master this "change. "

Suppliers’ “learn by doing” may harm buyers’ interests

The research results show that "learning by doing" can improve the efficiency of the entire supply system on the one hand. On the other hand, buyers have to pay more if suppliers want to make more profit, which means that buyers harm the interests of suppliers.

The study reveals reasons why suppliers “voluntarily disclose” private information

Sometimes suppliers voluntarily disclose some private information, such as information about costs, production capacities, etc. It seems that voluntary disclosure of private information reduces the information advantage of suppliers and buyers can benefit from knowing the true situation, but is this really the case? ZHANG Wei’s team has found that suppliers’ disclosure of private information influences the buyer’s sourcing strategy and thus the final sourcing contract, so the supplier can ultimately benefit from it. This explains why suppliers sometimes disclose private information voluntarily and without consideration.

ZHANG Wei’s team paid attention to the importance of suppliers’ "learning by doing" in the formulation of procurement contracts and enriched the theory of dynamic mechanism design. In previous studies, most researchers relied on the principle of one-time deviation. In the research model, ZHANG Wei’s team paid attention to the equilibrium in which suppliers deviate multiple times (double deviation equilibrium).

In addition, ZHANG Wei’s team found in their research that previous research may have ignored the negative effects of “learning by doing”, overestimated the benefits of supplier learning, and also overestimated the harm of information asymmetry.

Practical Value

■ The team’s research combines management disciplines with social and economic practices. By introducing the phenomenon of suppliers “learning by doing”, they refine the supply chain management experience and expand the theoretical system of supply chain management.

■ The research results of ZHANG Wei’s team explain why suppliers are willing to "overproduce" and "voluntarily disclose private information" in order to gain more profit and value. At the same time, they discovered the "one-sidedness" of the traditional academic view that the existence of private information leads to a downward bias in purchasing volume, overturning the conclusion that " traditional views predict that private information after the contract will not cause losses to buyers. "

■ Their research findings remind supply chain managers that they should not blindly advocate "learning by doing," as supplier learning can amplify the agency effect and cause buyer loss of interest. They suggest that supply chain managers should strategically exploit the phenomenon of supplier learning, e.g. by dynamically allocating sourcing quantities to multiple suppliers to manage their experiential learning and thereby control differences in their production capabilities.

In addition, this research finding also reminds suppliers that they can suffer losses if they ignore the existence of " learning by doing" . On the one hand, this can waste the supplier’s learning potential, and on the other hand, it can lead to the entire procurement system being less balanced and less efficient.

- We are glad to see that our academics at the School of Management restlessly enrich the theoretical system of management knowledge with high-quality scientific research results.

- You can read the original article in Chinese  here