A novel mechanism in a dual-sourcing supply chain with supply disruption risk: The fraction-committed procurement contract

Abstract

Supply disruption risk in the supply chain is becoming a vital threat for procurement managers worldwide with the turbulent and unsafe nature of the world. In this paper, we consider a supply chain in which a regular manufacturer exposed to disruption risk offers a product to a retailer. The retailer also can choose to purchase the product from a reliable outside manufacturer at a higher wholesale price. We build two procurement contracts: the wholesale price procurement contract and the fraction-committed procurement contract, and study their effects on the firms’ performances. Our equilibrium analysis reveals that the regular manufacturer’s wholesale price under the wholesale price procurement contract is not higher than that under the fraction-committed procurement contract. More interestingly, although the retailer can first decide the order fraction under the fraction-committed procurement contract, she prefers the wholesale price procurement contract to the fraction-committed procurement contract. However, the regular manufacturer and the whole supply chain would tend to select the fraction-committed procurement contract under some conditions. Therefore, the regular manufacturer can compensate the retailer through a contract to achieve a win–win situation under the fraction-committed procurement contract.