Managing disruption risk in competing multitier supply chains

Abstract

AbstractThis paper studies the sourcing problem of two competing manufacturers in two supply chains. Each supply chain consists of a Tier 0 manufacturer, a Tier 1 supplier, and a pair of Tier 2 suppliers with different disruption probabilities. The two manufacturers are engaged in Cournot competition. The two Tier 1 suppliers that serve different manufacturers may procure from different or the same Tier 2 suppliers. We investigate the impact of upstream supply chain structures on the manufacturers' performance by comparing two representative configurations: the paralleled supply chain configuration, which has no overlap in Tier 2 suppliers, and the overlapped supply chain configuration, which has the same Tier 2 suppliers. We derive the manufacturers' equilibrium sourcing strategies in the two configurations. When the more reliable Tier 2 supplier is quite reliable or the more unreliable Tier 2 supplier is very unreliable, both manufacturers offer a low wholesale price to induce their Tier 1 suppliers for single sourcing. When the more reliable Tier 2 supplier is not sufficiently reliable and the more unreliable Tier 2 supplier is not that unreliable, both manufacturers offer a high wholesale price to induce their Tier 1 suppliers for dual sourcing. There are also certain conditions under which one manufacturer chooses the high‐price sourcing strategy and the other one chooses the low‐price sourcing strategy. Besides, we demonstrate that competition decreases the manufacturers' incentives to induce dual sourcing. In a more competitive market, the manufacturers prefer less overlap in their upper suppliers. Finally, we conduct several extensions to show the robustness of our findings.