Multisourcing and Miscoordination in Supply Chain Networks

Abstract

This paper studies sourcing decisions of firms in a multitier supply chain when procurement is subject to disruption risk. We argue that features of the production process that are commonly encountered in practice (including differential production technologies and financial constraints) may result in the formation of inefficient supply chains, owing to the misalignment of the sourcing incentives of firms at different tiers. We provide a characterization of the conditions under which upstream suppliers adopt sourcing strategies that are suboptimal from the perspective of firms further downstream. Our analysis highlights that a focus on optimizing procurement decisions in each tier of the supply chain in isolation may not be sufficient for mitigating risks at an aggregate level. Rather, we argue that a holistic view of the entire supply network is necessary to properly assess and secure against disruptive events. Importantly, the misalignment we identify does not originate from cost or reliability asymmetries. Rather, firms' sourcing decisions are driven by the interplay of the firms' risk considerations with nonconvexities in the production process. This implies that bilateral contracts that could involve under-delivery penalties may be insufficient to align incentives.

Disruption Risk and Optimal Sourcing in Multitier Supply Networks

“…In contrast to these models, in which risk is determined by firm actions or financial subsidies, we consider how the choice of tier 1 and tier 2 suppliers impacts the shape, and subsequently the risk, of the supply network. Bimpikis et al (2013) also consider how the endogenous choice of risky tier 2 suppliers impacts the supply chain; however, they focus on how nonconvexities of the production function affect supply chain risk, whereas we focus on how supplier asymmetries and access to different sets of tier 2 suppliers can influence the optimal sourcing strategy of the downstream manufacturer. To summarize, our model is, to the best of our knowledge, among the first to explore disruption risk management in supply chains with more than two tiers and the first to consider how supplier selection and contracting impacts the shape and disruption risk level of the supply chain.…”

Cascading Failures in Production Networks

“… A parallel literature in operations research, for example, Bimpikis, Fearing, and Tahbaz‐Salehi () and Bimpikis, Candogan, and Ehsani (), has also emphasized how disruptions in supply‐chains can result in inefficient network formation and amplify aggregate risk. …”

Multitier Incentive Strategies for Quality Improvement: Case of Three‐Tier Supply Chain

“…Huang, Song, and Swinney (2015) consider whether an S2 should be managed for social and environmental standards compliance through direct control or by delegation to an S1. Bimpikis, Fearing, and Tahbaz-Salehi (2014), Simchi-Levi et al (2015), and Ang et al (2016) investigate a sourcing problem involving S1s and S2s that considers disruption risks from natural disasters.…”