Vulnerable Options in Supply Chains: Effects of Supplier Competition

Abstract

Concerned with the risk of supplier default, a firm may choose to diversify its orders among multiple suppliers. Furthermore, the discrepancy in production lead-times among suppliers furnishes a firm with a valuable option to defer ordering decisions until uncertainty has been partially resolved. The suppliers also have an option: to defer their pricing decisions. Using a single-period, multi-stage model of a two-echelon supply chain with competing risky suppliers and a single manufacturer, this paper investigates how the supplier default risk and default co-dependence affect manufacturer procurement and production decisions, supplier pricing decisions, firms profits, and the deferment option value and how the introduction of the deferment option alters supplier competition.

Keywords: resilient supply chains, supply risk, supply disruptions, competition, option pricing, multi-sourcing, backup supplier

JEL Classification: C60, C70, C69, C79, D24