Information sharing and order allocation rule in dual-sourcing

Abstract

This study investigates the implication of demand information sharing in a supply chain where a manufacturer sources an emerging component from two capacitated suppliers. The two suppliers compete for the manufacturer's order in the emerging market and the demand in the mature market. Two common rules are examined for the manufacturer to allocate its order: fixed allocation rule, with which the ratio to each supplier is fixed, and proportional allocation rule, where the proportion depends on the reserved capacities of the two suppliers for the manufacturer. Our results show that the manufacturer's incentive to share demand information depends on the allocation rule and the option of side payment that the manufacturer proposes between itself and the suppliers for information sharing. Under the fixed allocation rule, no sharing occurs with or without side payment. Under the proportional allocation rule, no sharing occurs without side payment, because full information sharing benefits the manufacturer but hurts the supplier with a low production cost when the information accuracy is low and the mature market potential is moderate. With side payment, the manufacturer shares information with the two suppliers when the information accuracy is not too high and the mature market potential is moderate. Moreover, we examine the influence of information sharing on the choice of the allocation rule. Result shows that the manufacturer's preference for the allocation rule depends on the information accuracy, the mature market potential, and the ratio of the fixed allocation rule. Compared with no sharing, the sharing behavior drives the manufacturer more likely to select the proportional allocation rule.