Government should be merciful or strict: Penalizing defaulting suppliers in emergency supply chains

Abstract

The potential for profit-seeking suppliers in emergency supply chains (ESCs) to default and how to penalize defaulting suppliers has not been adequately discussed. In this paper, we construct an ESC consisting of a supplier and a government, in which the supplier pre-stocks supplies for the government for a pre-disaster contract period, and the government orders supplies from the supplier after the disaster based on actual demand. Our research question is how to choose an appropriate penalty measure (PM) in the face of default by suppliers who stock different types of supplies. The results show that the higher storage cost for supplies not be ordered after the contract period can reduce suppliers’ incentives to pre-stock supplies and even lead to supplier default, and that a reduction in the quantity ordered by the government from suppliers can reduce the likelihood of supplier default. The government should take merciful PMs to penalize the defaulting supplier who pre-stocks supplies with high marketability or high market price, and strict PMs to penalize the defaulting supplier who pre-stocks supplies with low marketability or low market price. In addition, although it is difficult to accurately measure the losses incurred by default, we can still penalize defaulting suppliers based on the default quantity. Finally, we also find that constructing compromise PMs allows the government to find a balance between strictness and mercy. By adjusting the degree of compromise, the government can choose the penalty strength appropriate to the situation.