Supply chain hoarding and contingent sourcing strategies in anticipation of price hikes and product shortages

Abstract

In anticipation of price hikes and shortages caused by supplier disruptions and manufacturer production stops, customers might stockpile extra products. In the case of a supplier disruption, a manufacturer may decide to continue producing using a contingent source. Capturing the price dynamics in four disruption-related periods (i.e., responding, rising, recovering, and recovered), we derive optimal hoarding policies for customers. The results indicate that customer hoarding decisions fall into multiple patterns depending on the interactions between disruption events, market responses (quick and slow), and market recovery (instant, quick, slow, and never). We next present contingent sourcing tactics for manufacturers to mitigate disruptions with and without customer hoarding. We find that future price increases could induce contingent sourcing even if it is unprofitable to resume production during the price-responding phase. Our results offer recommendations regarding when and how to use hoarding and contingent sourcing accounting for uncertain disruption duration and asymmetric information along with disruption- and recovery-driven price dynamics. These recommendations can be of particular value for supply chain decision-making at times of growing inflation. We also demonstrate the impacts of customer hoarding and disruption information on the value of contingent sourcing.