Contingent Sourcing Under Supply Disruption and Competition
24 Pages Posted: 12 Dec 2013 Last revised: 22 Mar 2014
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: Suggested Citation