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Outsourcing strategy and production disruption of supply chain with demand and capacity allocation uncertainties

Kebing Chen and Tiaojun Xiao

International Journal of Production Economics, 2015, vol. 170, issue PA, 243-257

Abstract: This paper develops supply chain game models with multiple uncertainties, and studies the impact of channel power on the efficiency of supply chain. Besides the regular production run, the manufacturer may choose the outsourcing mode due to his production disruption risk and uncertainty of capacity allocation. We find that the manufacturer has no incentive to outsource when both the disruption risk is low enough and his production capacity is large enough. When the disruption risk is sufficiently high, the manufacturer will fully outsource production regardless of the production capacity. There is a zone of order-difference outsourcing where the manufacturer just outsources the part in excess of the certain threshold value. Under the retailer-Stackelberg (RS) game, the manufacturer׳s order-difference outsourcing strategy can induce the retailer to order more items. Unlike RS, the retailer in the manufacturer-Stackelberg (MS) game always orders a quantity equal to that in the classic newsvendor model. Meanwhile, we find that the channel power does not affect the player’s decision except in the zone of order-difference outsourcing. Compared with MS, the dominant retailer can better deal with the uncertainties and make better use of demand information. From the channel׳s perspective, the two players have the different attitudes towards the risks. The dominant manufacturer prefers to forcibly offload production risks to his partner, while the dominant retailer in RS actively takes the partner׳s risks.

Keywords: Supply chain management; Disruption; Channel power; Capacity allocation; Coordination mechanism; Game theory (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:proeco:v:170:y:2015:i:pa:p:243-257