Competition and Diversification Effects in Supply Chains with Supplier Default Risk

Abstract

We study the effects of disruption risk in a supply chain where one retailer deals with competing risky suppliers who may default during their production lead times. The suppliers, who compete for business with the retailer by setting wholesale prices, are leaders in a Stackelberg game with the retailer. The retailer, facing uncertain future demand, chooses order quantities while weighing the benefits of procuring from the cheapest supplier against the advantages of order diversification. For the model with two suppliers, we show that low supplier default correlations dampen competition among the suppliers, increasing the equilibrium wholesale prices. Therefore the retailer prefers suppliers with highly correlated default events, despite the loss of diversification benefits. In contrast, the suppliers and the channel prefer defaults that are negatively correlated. However, as the number of suppliers increases, our model predicts that the retailer may be able to take advantage of both competition and diversification.resilient supply chains, supply risk, supply disruptions, competition, procurement, default correlation, equilibrium pricing

Environmentally Responsible Supply Chains

“…Models that examine how supplier competition can impact a supplier's nonprice performance have been applied to a broad range of OM topics such as supply disruption risk (e.g., Babich 2006;Babich et al 2007), yield uncertainty (e.g., Federgruen and Yang 2009; Tang and Kouvelis 2011), service (e.g., Cachon and Zhang 2007;Ha et al 2003), and quality (e.g., Elahi et al 2007;Gans 2002). 3 For example, Elahi et al (2007) use supplier competition to elicit a supplier's service quality, comparing the supplier's performance under multi-supplier and single-supplier settings.…”

Dual sourcing and backup production: Coexistence versus exclusivity

“…Dada et al [8] considered the problem of a newsvendor served by multiple unreliable suppliers. Babich et al [5] studied the effects of supply disruption in a supply chain where a retailer faced uncertain demand and sourced from two suppliers. Tomlin [35] investigated how supply yield distribution learning influences both sourcing and inventory strategies in dual-sourcing and singlesourcing models.…”

“…Bernoulli yield model. This is the most widespread assumption in the supply disruption literature [5,35,44]. The probability of successful delivery for supplier S i is θ i (0 o θ i o 1, i¼ 1,2).…”

“…Anupindi and Akella [2], Swaminathan and Shanthikumar [31], Babich et al [5], Tomlin [35], Wang et al [38] and Tang and Kouvelis [33] all studied the core benefit of dual sourcing: ex-ante risk diversification. Meanwhile, backup sourcing is usually activated after a firm learns more about production or demand risk [4,34,44], which can be regarded as ex-post (interim) expediting orders.…”

Strategy decision of business interruption insurance and emergency supply strategy based on supply disruptions

“…Zhu and Fu (2013) explored the trade-off between ordering policies and disruption risks in a dual-sourcing network under specific (or not) service level constraints. Babich, -111-Journal of Industrial Engineering and Management -http://dx.doi.org/10.3926/jiem.1346 Burnetas and Ritchken (2007) investigated the decision of pricing, ordering and vendor selection under random interruption.…”