Strategic Analysis of Dual Sourcing and Dual Channel with an Unreliable Alternative Supplier

Abstract

In today's increasingly interconnected world, co-opetition has emerged as a new business practice among the technology firms. The boundaries between cooperation and competition have been becoming vague, where rivals engage in collaborative activities. One of the most critical challenges facing the co-opetitive supply chain concerns with the sourcing strategy. This study develops an analytical model to investigate the strategic decision of the original equipment manufacturer (OEM) in the presence of a competitive supplier (i.e. frenemy) as well as a non-competitive supplier who nevertheless suffers from unreliable production technology. We find that the OEM always prefers the supplier diversification by engaging the additional non-competitive supplier although the non-competitive supplier experiences the yield uncertainty problem. Further, we show that the non-competitive supplier's expected profit is unimodal in its technology level in the dual sourcing scenario. This result suggests that the non-competitive supplier may not have incentives to further improve its production technology once it reaches a threshold. Finally, we investigate the credibility of competitive supplier's threat to stop supplying the components to OEM as a response of OEM's engagement of a new supplier. We show that the termination of component-selling business by competitive supplier is a non-credible threat to prevent OEM seeking the alternative supplier.