Contingent Sourcing Under Supply Disruption and Competition

Abstract

With the increasing awareness of the serious consequences of supply disruption risk, firms adopt various kinds of strategies to mitigate it. We consider a supply chain in which two suppliers sell components to two competing manufacturers producing and selling substitutable products. Supplier 1 is unreliable and cheap while Supplier 2 is reliable and expensive. Firm 1 uses a contingent dual sourcing strategy and Firm 2 uses a single sourcing strategy. We study the implications of the contingent sourcing strategy under competition and in the presence of a possible supply disruption. The time of the occurrence of the supply disruption is uncertain and exogenous, but the procurement time of components is in the control of the firms. We show that supply disruption and procurement times jointly impact the firms’ buying decisions. We characterize the firms’ optimal order quantities and their expected profits under different cases. Finally, through numerical computations, we obtain additional managerial insights.