Strategic Behavior of Suppliers in the Face of Production Disruptions

Süleyman Demirel (), Roman Kapuscinski () and Man Yu ()
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Süleyman Demirel: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Roman Kapuscinski: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Man Yu: Department of Information Systems, Business Statistics and Operations Management, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong

Management Science, 2018, vol. 64, issue 2, 533-551

Abstract: To mitigate supply disruption risks, some manufacturers consider a flexible sourcing strategy, where they have an option of sourcing from multiple suppliers, including regular unreliable suppliers and backup reliable ones. Our objective is to evaluate the costs and benefits associated with flexible sourcing when suppliers are strategic price setters. We show that when each supplier announces a single (wholesale) price, such a game leads to a conflict of incentives and is not realistic in most practical settings. Therefore, we focus on a contingent-pricing game, with wholesale prices contingent on the manufacturer’s sourcing strategy. We describe the resulting equilibrium outcomes corresponding to the manufacturer’s different sourcing and inventory strategies. We show that in equilibrium, inventories are carried either by the manufacturer or by the unreliable supplier, but not both. The manufacturer does not necessarily benefit from the existence of a backup supplier and, in fact, is typically worse off. Similarly, supply chain performance may degrade. Thus, an up-front commitment to sole sourcing may be beneficial. Interestingly, suppliers may benefit from flexible sourcing even though the manufacturer does not. The main results extend to cases when partial backup sourcing is allowed, both suppliers are unreliable, recovery times are non-memoryless, an unreliable supplier may provide a richer set of contingent prices, or the supplier may be risk averse. The online supplementary document is available at https://doi.org/10.1287/mnsc.2016.2626 . This paper was accepted by Yossi Aviv, operations management.

Keywords: supply chain disruptions; flexible sourcing; reliability; price competition; supply contracts (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (16)

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