Comparative Studies of Three Backup Contracts Under Supply Disruptions

Abstract

We focus our research on a supply chain involving one buyer and two independent suppliers of the same product. The main supplier is prone to supply disruption and recurrent supply uncertainty, and the backup supplier is perfectly reliable but supply goods at higher prices. Three kinds of backup contracts between the buyer and the backup supplier are investigated to mitigate supply risks: A capacity reservation contract, a make-to-order contract, and a buy-back contract. Models are developed to study how the buyer's expected profit and optimal decisions related to each contract change with the supply risks. We also examine the sensitivity of various cost parameters on the optimal decisions, and compare the values of three backup contracts for the buyer. Furthermore, we present how these results differ from those obtained in the analysis with demand uncertainty considered. Our study provides managerial insights into the positive effects of different backup contracts on the buyer's expected profit in the events of unexpected disruption.