Managing Supply Uncertainty Under Chain-to-Chain Competition

Abstract

We study the competition of two supply chains which are subject to supply uncertainty. Each supply chain consists of a supplier and a retailer. The retailers engage in Cournot competition by determining order quantities from their exclusive suppliers. The suppliers may not be able to fulfill the retailer orders at all time due to various causes. We examine the decisions of the suppliers and retailers at three different levels. At the operational level, we show that a retailer should order more (less) if its competing retailer has a less (more) reliable supply. Compared to chain competition without supply uncertainty, retailer's order sizes can be larger or smaller. At the design level, we consider two types of contracts and characterize their optimal contract terms under supply uncertainty. At the strategic level, we show that supply chain coordination is a dominant strategy, and customers are always better off. Nevertheless, supply chain coordination may or may not result in positive gains for the supply chain itself. If supply risk is low, coordination actually could decrease supply chain profit, which results in a prisoner's dilemma; If supply risk is high, coordination always increases supply chain profit.

Keywords: Supply uncertainty, supply chain contracting, Cournot competition