Sourcing diversification: Strategy selection, sourcing allocation and brand power

Abstract

The supply of power batteries is monopolised by a few suppliers, resulting in high purchasing costs for electric vehicle manufacturers (EVMs). Hence, some EVMs have implemented diversified sourcing strategies to seek purchase concessions and reduce their dependence on battery suppliers. Motivated by the sourcing strategies of EVMs, we develop a game-theoretic model to investigate the optimal procurement strategies of manufacturers with different brand power. The model consists of a primary supplier, an alternative supplier, and two competing manufacturers, wherein the focal manufacturer has the option of implementing dual sourcing or partial outsourcing through sourcing allocation, whereas the rival manufacturer only sources from the primary supplier. Specifically, we first study the focal manufacturer’s three procurement strategies under the primary supplier’s uniform pricing: single sourcing (the benchmark), dual sourcing and partial outsourcing. Then, we examine the primary supplier’s strategic response to the manufacturer’s sourcing diversification: maintaining uniform pricing or switching to differential pricing. By analysing the equilibrium profits, we find that compared with the situation under single sourcing, both the primary supplier and the focal manufacturer may obtain higher profits under dual sourcing or partial outsourcing. However, with an increase in the focal manufacturer’s order proportion, the primary supplier’s profit may decrease; and the focal manufacturer’s diversified sourcing strategy may hurt all the supply chain players. Furthermore, we show that when the primary supplier considers switching to differential pricing, the focal manufacturer tends to abandon the diversified sourcing and adopt single sourcing.