Supplier Diversification Strategies in the Presence of Yield Uncertainty and Buyer Competition

Sammi Yu Tang () and Panos Kouvelis ()
Additional contact information
Sammi Yu Tang: Department of Management, School of Business, University of Miami, Coral Gables, Florida 33146
Panos Kouvelis: Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130

Manufacturing & Service Operations Management, 2011, vol. 13, issue 4, 439-451

Abstract: The benefits of supplier diversification are well established for price-taking firms. In this paper, we investigate the benefits from supplier diversification for dual-sourcing duopolists. We consider a two-echelon supply chain in which suppliers sell components to buyers who produce and sell substitutable products. The suppliers' output processes are uncertain and modeled as having a proportional random yield. Buyers engage in a quantity-based Cournot competition. We find that an increase in supplier correlation leads to more correlated buyers' outputs and a decrease in their profits. In the presence of end-market competition, dual sourcing still brings value by reducing the inefficiency caused by random yield: Namely, when the suppliers' yield processes are strongly negatively correlated, dual sourcing increases the expected market output and improves the firms' profits over sole sourcing. However, unlike a monopolist firm, a duopolist does not necessarily allocate its supplier orders to minimize output variability. We generalize the main results to a two-stage order-quantity-output-quantity game and to one with asymmetric suppliers.

Keywords: supply uncertainty; random yield; Cournot competition; dual sourcing; equilibrium (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

Downloads: (external link)
http://dx.doi.org/10.1287/msom.1110.0337 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:13:y:2011:i:4:p:439-451

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().