EXPRESS: Impact of Unreliable Supplier on a Supply Chain with Demand-Generating Marketing

Abstract

A firm often has multiple sourcing options for its product. Some suppliers may have longer lead times but offer lower prices, whereas reliable suppliers with quick response capabilities may have higher prices. Purchasing from a cheaper, less reliable supplier can help a firm lower its inventory cost but will expose itself to potential risks. This paper analyzes a supply chain in which a manufacturer can source from a cheaper, less reliable supplier with a long lead time and/or a reliable quick-response supplier. The manufacturer also has to make demand-generating marketing investments before the selling season. Our analysis shows that if the unreliable supplier’s reliability is low, the reliable supplier will charge a low wholesale price; otherwise, it will choose a high wholesale price. As the unreliable supplier’s reliability improves, the manufacturer is inclined to increase its marketing investment, but there is a drop at some critical threshold. Interestingly, the existence of an unreliable supplier can lead to a win-win outcome for the reliable supplier and the manufacturer. The unreliable supplier’s reliability has non-monotonic effects on the equilibrium profits of the reliable supplier and the manufacturer.