Dual Sourcing Strategy for High-Tech Manufacturer Under Supply Risk and Capacity Constraint

Abstract

High-tech manufacturers frequently suffer from supply risk and capacity constraint. This paper considers a manufacturer who procures a type of high-tech component from two suppliers with asymmetric costs, capacities, and reliabilities, where the low-cost supplier has low reliability. One supplier is selected as a primary supplier and another as a backup supplier. The manufacturer places regular order to the primary supplier and determines backup order quantity from the backup supplier after random yield realization of the primary supplier. By developing a dynamic game-theoretical model, we obtain the optimal wholesale prices for the primary supplier and backup supplier, the optimal order quantity and supplier arrangement decisions for the manufacturer. We show that the manufacturer selects the low-cost supplier as a primary supplier and the high-cost supplier as a backup supplier (namely, LH policy) when the reliabilities of the two suppliers are close. When these reliabilities are not so close, the manufacturer chooses the high-cost supplier as a primary supplier and the low-cost supplier as a backup supplier (namely, HL policy). In addition, the manufacturer in the industry with scale diseconomies is more likely to select HL policy than that in the industry with scale economies. Compared with centralized decision making scheme, decentralized scheme induces the manufacturer more likely to select HL policy in the industry without scale economies, whereas in the industry with scale economies, decentralized scheme induces the manufacturer more likely to choose either HL policy when the capacity advantage of the low-cost supplier is weak, or LH policy when this advantage is significant.