Contingent Sourcing Under Supply Disruption and Competition

24 Pages Posted: 12 Dec 2013 Last revised: 22 Mar 2014

See all articles by Bo He

Bo He

Chongqing University - School of Economy and Business Administration

Varun Gupta

University of Texas at Dallas

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: September 26, 2013

Abstract

With the increasing awareness of the serious consequences of supply disruption risk, firms adopt various kinds of strategies to mitigate it. We consider a supply chain in which two suppliers sell components to two competing manufacturers producing and selling substitutable products. Supplier 1 is unreliable and cheap while Supplier 2 is reliable and expensive. Firm 1 uses a contingent dual sourcing strategy and Firm 2 uses a single sourcing strategy. We study the implications of the contingent sourcing strategy under competition and in the presence of a possible supply disruption. The time of the occurrence of the supply disruption is uncertain and exogenous, but the procurement time of components is in the control of the firms. We show that supply disruption and procurement times jointly impact the firms’ buying decisions. We characterize the firms’ optimal order quantities and their expected profits under different cases. Finally, through numerical computations, we obtain additional managerial insights.

Keywords: contingent sourcing, supply disruption, game theory, risk management

JEL Classification: C70

Suggested Citation

He, Bo and Gupta, Varun and Sethi, Suresh, Contingent Sourcing Under Supply Disruption and Competition (September 26, 2013). Available at SSRN: https://ssrn.com/abstract=2366221 or http://dx.doi.org/10.2139/ssrn.2366221

Bo He

Chongqing University - School of Economy and Business Administration ( email )

No.174 Shazhengjie
Shapingba
Chongqing, Chongqing 400044
China

Varun Gupta (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

HOME PAGE: http://www.utdallas.edu/~varun.gupta

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

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