Competition and Diversification Effects in Supply Chains with Supplier Default Risk

Babich, Volodymyr; Ritchken, Peter H.; Burnetas, Apostolos

doi:10.2139/ssrn.903773

Cited by 110 publications

(156 citation statements)

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“…This literature models reliability in three different but related ways: random capacity, e.g., Ciarallo et al (1994), Erdem (1999), random yield, e.g., Gerchak and Parlar (1990), Parlar and Wang (1993), Anupindi and Akella (1993), Agrawal and Nahmias (1997), Swaminathan andShanthikumar (1999), Federgruen andYang (2007a), and random disruption, e.g., Parlar and Perry (1996), Gürler and Parlar (1997), Tomlin (2006), Babich et al (2007). Financial default is another element of supply risk and has recently been explored by Babich et al (2007) and Swinney and Netessine (2008).…”

Section: Literaturementioning

confidence: 99%

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Mitigating Supply Risk: Dual Sourcing or Process Improvement?

Wang

Gilland

Tomlin

2010

M&SOM

326

208

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Surveys suggest that supply chain risk is a growing issue for executives and that supplier reliability is of particular concern. A common mitigation strategy observed in practice is for the buying firm to expend effort improving the reliability of its supply base. We explore a model in which a firm can source from multiple suppliers and/or exert effort to improve supplier reliability. For both random capacity and random yield types of supply uncertainty, we propose a model of process improvement in which improvement efforts (if successful) increase supplier reliability in the sense that the delivered quantity (for any given order quantity) is stochastically larger after improvement. We characterize the optimal procurement quantities and improvement efforts, and generate important insights. For random capacity, improvement is increasingly favored over dual sourcing as the supplier cost heterogeneity increases but dual sourcing is favored over improvement if the supplier reliability heterogeneity is high. In the random yield model, increasing cost heterogeneity can reduce the attractiveness of improvement, and improvement can be favored over dual sourcing if the reliability heterogeneity is high. A combined strategy (improvement and dual sourcing) can provide significant value if suppliers are very unreliable and/or capacity is low relative to demand.

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Section: Literaturementioning

confidence: 99%

“…See for example Tomlin (2006), Babich et al (2007), Dada et al (2007), and Federgruen and Yang (2007a). In practice, firms can and do take actions to improve supplier reliability in lieu of or in addition to sourcing from multiple suppliers:…”

Section: Introductionmentioning

confidence: 99%

Mitigating Supply Risk: Dual Sourcing or Process Improvement?

Wang

Gilland

Tomlin

2010

M&SOM

326

208

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“…Several recent works study dual-sourcing motivated by disruption and risk management; see Tomlin and Wang (2005), Babich et al (2007), Yang et al (2012), Gümüs et al (2010). In these works, usually the capacity of each supplier is modeled with a Bernoulli random variable, with some probability the supplier fails to produce any supply and with the remaining probability yields a certain quantity.…”

Section: Related Workmentioning

confidence: 99%

Technical Note—Nonlinear Pricing Competition with Private Capacity Information

Nazerzadeh¹,

Perakis²

2016

Operations Research

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We analyze the equilibrium of an incomplete information game consisting of two capacity-constrained suppliers and a single retailer. The capacity of each supplier is her private information. Conditioned on their capacities, the suppliers simultaneously and non-cooperatively offer quantity-price schedules to the retailer.Then, the retailer decides on the quantities to purchase from each supplier in order to maximize his own utility. We prove the existence of a (pure strategy) Nash equilibrium for this game. We show that at the equilibrium each (infinitesimal) unit of the supply is assigned a marginal price which is independent of the capacities and depends only on the valuation function of the retailer and the distribution of the capacities.In addition, the supplier with the larger capacity sells all her supply.

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“…In a closely related paper, Babich et al (2005) analyze a model with multiple suppliers and a single buyer, wherein suppliers face an exogenous probability of default and act as Stackelberg leaders in setting the wholesale price for a downstream newsvendor. Our model di¤ers in that the default risk is endogenous (i.e., it is a function of the contract price between buyer and supplier, implying the buyer's business has a signi…cant e¤ect on the supplier's …nancial health) and the bargaining power lies with the buyer.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Our model di¤ers in that the default risk is endogenous (i.e., it is a function of the contract price between buyer and supplier, implying the buyer's business has a signi…cant e¤ect on the supplier's …nancial health) and the bargaining power lies with the buyer. Furthermore, Babich et al (2005) consider a single period model, whereas our model considers contracting e¤ects over multiple periods. Related papers include Babich (2006).…”

Section: Literature Reviewmentioning

confidence: 99%

Long-Term Contracts Under the Threat of Supplier Default

Swinney

Netessine

2009

M&SOM

143

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Contracting with suppliers prone to default is an increasingly common problem in some industries, particularly automotive manufacturing. We model this phenomenon as a two-period contracting game with two identical suppliers, a single buyer, deterministic demand, and uncertain production costs. The suppliers are distressed at the start of the game and do not have access to external sources of capital; hence, revenues from the buyer are crucial in determining whether default occurs. The production cost of each supplier is the sum of two stochastic components: a common term that is identical for both suppliers (representing raw materials costs, design specifications, etc.) and an idiosyncratic term that is unique to a given supplier (representing inherent firm capability). The buyer chooses a supplier and then decides on a single-or twoperiod contract. Comparing models with and without the possibility of default, we find that, without the possibility of supplier failure, the buyer always prefers short-term contracts over long-term contracts, whereas this preference is typically reversed in the presence of failure. Neither of these contracts coordinates the supply chain. We also consider dynamic contracts, in which the contract price is partially tied to some index representing the common component of production costs (e.g., commodity prices of raw materials such as steel or oil), allowing the buyer to shoulder some of the risk from cost uncertainty. We find that dynamic longterm contracts allow the buyer to coordinate the supply chain in the presence of default risk. We also demonstrate that our results continue to hold under a variety of alternative assumptions, including stochastic demand, allowing the buyer the option of subsidizing a bankrupt supplier via a contingent transfer payment or loan and allowing the buyer to unilaterally renegotiate contracts. We conclude that the possibility of supplier default offers a new reason to prefer long-term contracts over short-term contracts. Contracting with suppliers prone to default is an increasingly common problem in some industries, particularly automotive manufacturing. We model this phenomenon as a two period contracting game with two identical suppliers, a single buyer, deterministic demand, and uncertain production costs. The suppliers are distressed at the start of the game and do not have access to external sources of capital, hence revenues from the buyer are crucial in determining whether or not default occurs. The production cost of each supplier is the sum of two stochastic components: a common term that is identical for both suppliers (representing raw materials costs, design speci…cations, etc.), and an idiosyncratic term that is unique to a given supplier (representing inherent …rm capability). The buyer chooses a supplier and then decides on a single or two period contract. Comparing models with and without the possibility of default, we …nd that without the possibility of supplier failure, the buyer always prefers short-term contracts over long...

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Competition and Diversification Effects in Supply Chains with Supplier Default Risk

Cited by 110 publications

References 0 publications

Mitigating Supply Risk: Dual Sourcing or Process Improvement?

Mitigating Supply Risk: Dual Sourcing or Process Improvement?

Technical Note—Nonlinear Pricing Competition with Private Capacity Information

Long-Term Contracts Under the Threat of Supplier Default

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