Julia Cajal Grossi

Research Session: New Insights from Supply Chain Research

Searching for Trade Partners in Developing Countries

An integral part of global supply chains is the selection by international buyers of trading partners in developing countries. However, our understanding of how buyers find a suitable long term supplier is limited. I use unique buyer-seller customs data to directly observe experimentation activity in a large market - the “fast fashion” industry in Bangladesh. I study how buyers of ready-made garments conduct trials of suppliers at the order-product level before settling into sustained sourcing relationships. To illustrate this process, I use a model of idiosyncratic search costs where the buyer’s costs of testing a manufacturer are determined by the heterogeneity of potential suppliers. The model shows that (1) higher supplier heterogeneity is associated with lower experimentation, (2) as heterogeneity increases, search activity falls more markedly for larger buyers than for their smaller counterparts, and (3) while buyer-seller matches are positively assortative, more heterogeneous settings see all buyers -and more markedly, large buyers- willing to accept relationships with (weakly) worse suppliers. These implications are strongly supported by the data, and hold in terms of within-buyer, cross-market differences in experimentation behavior. Finally I show that these information frictions, rooted in supplier heterogeneity, matter for the distribution of rents in these relationships: price-cost margins for suppliers are positively related to the degree of heterogeneity in the environment.

Buyers' Sourcing Strategies and Suppliers' Markups in Bangladeshi Garments

Do suppliers' margins in global value chains depend on buyers' approach to sourcing? We distinguish between international buyers adopting relational versus spot sourcing strategies in the Bangladeshi garment sector. Our data allow us to match inputs used by exporters to produce specific orders for different buyers. Within suppliers, we show that orders produced for relational buyers earn higher prices than comparable orders produced for spot buyers. These orders however do not differ in the type, prices, or effciency of variable inputs. We interpret these patterns through the lens of a model of garment production that allows for capacity constraints, order-varying input prices, and a technology that is specific to the exporter, product, and time combination. The model yields a sufficient statistic for differences in markups across orders and, thus, across buyers. Within exporter-product-time triplets, we find that relational buyers pay approximately 11% higher markups relative to spot buyers for comparable export orders. Additional evidence suggests that these higher markups reflect, at least in part, incentives paid to suppliers to undertake non-contractible actions.