Impact of supply risk on cost pass-through

Abstract

ABSTRACT We study the cost pass-through rate in a supply chain setting where a buying firm sources from either a single unreliable supplier or dual unreliable suppliers. Numerous papers studying cost pass-through rates have assumed that supply is always certain and ample, which is not usually the case in practice. We find that the cost pass-through rate should depend on the supply uncertainty, its risk-sharing levels with upstream suppliers, and different sourcing strategies. In particular, the cost pass-through rate increases in supply risk-sharing levels, but decreases under single sourcing, compared to dual sourcing.