Managing supply chain disruption threat via a strategy combining pricing and self-protection

Abstract

In the past decade, supply chain disruptions continue to impact firms in different ways. To reduce such negative impacts, firms may take proactive actions to lower the probability of disruption. In this research, we study how firms can mitigate supply chain disruption threat by optimizing pricing decisions and launching proactive actions in the form of effort investment jointly. Pricing involves profit-seeking, while effort investment aims to hedge risks in advance and guarantee profits gain indirectly. We develop a series of models to study the interplay between pricing and effort investment, and the effect of the decision-making sequence, from the perspective of both the entire supply chain and individual parties. In the effort-price scenario, we find that both the supplier and the retailer invest in effort, and the supply chain is better off in the simultaneous effort investment game than in the sequential effort investment game. In the sequential effort investment game, the party that first invests effort is better off than in the simultaneous effort investment game. In the price-effort scenario, we find that only the retailer invests effort, and the supply chain's profit under single-effort investment is greater than under joint-effort investment when the sensitivity of the probability of operational failure to the retailer's effort is large enough. Finally, we extend our model to the scenarios of credit sales, partial damage and multiple retailers, and optimize the decisions accordingly.