Supply chain investments in capacity construction and disruption prevention

Abstract

With increasingly intensive competition in nowadays global market environment, components outsourcing becomes a normal production plan for manufacturers. How to secure capacity procurement throughout the supply chain proves to be an essential task. As the central member of a supply chain, the manufacturer has the urge to achieve capacity investment balance between himself and his supplier. When the manufacturer invests in capacity, one major concern is whether the supplier could improve her capacity accordingly. As the supplier intends to invest less than the manufacturer's expectation for the sake of less risk exposure. This paper studies how do the manufacturer and the supplier make an appropriate amount of investment in capacity construction. Other than the uneven capacity investment issue, how to deal with the disruption risk is also of vital significance. In this paper we investigate, taking disruption into consideration, how will the supply chain members react if precautions like disruption prevention investment is available. Examining the supply chain system of one manufacturer and one supplier, where both members are under disruption risk, this paper studies how to achieve the optimal investments in capacity construction and disruption prevention.