Question

Third parties increase the supply chain surplus if they either increase value for the customer or decrease the supply chain cost relative to the firm performing the task in-house. A third party may aggregate procurement for many small players and facilitate economies of scale in ordering, production, and inbound transportation. What mechanism is the third party using to grow the surplus?

a) Risk-sharing
b) Aggregation
c) Outsourcing
d) Collaboration

Answer 1

A third party uses aggregation to increase supply chain surplus by consolidating procurement for many smaller players, leading to economies of scale, enhanced negotiating power, and optimized transportation and production costs.

Step-by-step explanation:

The third party in the supply chain context is using aggregation to grow the surplus. Aggregation refers to the process where a third party consolidates the procurement for numerous smaller entities, thereby facilitating economies of scale. This can lead to reduced costs in ordering, production, and inbound transportation, which in turn increases the supply chain surplus by either enhancing customer value or reducing overall supply chain costs as compared to in-house management by the firms.

When a third party aggregates demand, it can negotiate better terms with suppliers, leverage more efficient production processes, and optimize transportation, which are essential aspects of increasing supply chain efficiency. This mechanism contrasts with externalities, where parties not directly involved in a transaction may experience extra benefits or incur additional costs.