Using a Dual-Sourcing Option in the Presence of Asymmetric Information about Supplier Reliability: Competition vs. Diversification

R ecent years have witnessed the pervasive supply disruptions and their impacts on supply chain performance. In this study, we investigate the optimal procurement design with supply disruptions and heterogeneous beliefs between the buyer and the supplier. We examine the impact of information asymmetry on the supplier's belief, the control right of the backup production, and the verifiability of supply disruption. The belief heterogeneity creates speculative gains and losses because the buyer and the supplier hold different estimates of the disruption probability. We demonstrate that the buyer's incentive to exploit this belief heterogeneity leads to real production inefficiencies in different scenarios. The production efficiency is not necessarily improved with more transparent information. Moreover, a very pessimistic supplier may have no incentive to invest in improving the reliability even if this is costless, and the supplier may produce more when the expected production cost becomes higher. When the buyer sees some value in using the supplier's estimate to update his own belief, we find that the main results hold unless the buyer completely abandons his belief.

Section: Buyer's Belief Updatingsupporting

confidence: 76%

Supply Disruptions, Heterogeneous Beliefs, and Production Efficiencies

Chen

2014

“…(), and Yang et al. (). More recent works that study the benefits of dual sourcing with reliable and unreliable suppliers include Kazaz (), Tomlin (), and Chen and Guo ().…”

Section: Literature Reviewmentioning

confidence: 99%

Offshore versus Onshore Sourcing: Quick Response, Random Yield, and Competition

Jung

2020

Motivated by the recent reshoring initiatives, we study firms’ global sourcing strategies from two different supply sources, offshore and onshore supply bases, under supply and demand uncertainty. Interestingly, even though onshore sourcing has a significant benefit from market responsiveness, offshore sourcing having no cost advantage also provides benefits in the presence of yield uncertainty and market competition. If competing firms commit single sourcing, one firm may choose inferior offshore sourcing to dampen competition. When a dual‐sourcing option is available, firms always utilize dual sourcing, offshore sourcing as well as onshore sourcing, for risk pooling purpose. Our result shows that risk pooling is an essential driver in supplier selection in that the need for dual sourcing cannot be eliminated by other influential factors (e.g., responsiveness and competition effect). However, we find that firms may suffer from a dual‐sourcing option under competition. This contrasts with the conventional wisdom that dual sourcing benefits firms in the presence of supply uncertainty. When it comes to order allocation, market responsiveness is not necessarily an order winner since it does not lead to a larger order to an onshore supplier if demand is guaranteed above a certain level. Under competition, firms’ order allocation is mainly determined by supply yield correlations.

“…, Sting and Huchzermeier , Yang et al. ), and, to a lesser extent, on reliability improvement in which the probability of a supply failure can be reduced by costly actions (Bakshi and Kleindorfer , Huang et al. , Tang et al.…”

Section: Literature Reviewmentioning

confidence: 99%

Production Chain Disruptions: Inventory, Preparedness, and Insurance

Dong

Tang

Tomlin

2018

Disruptions that temporarily interrupt production pose a significant risk for manufacturing firms. To manage this risk, firms can purchase interruption insurance and/or deploy operational measures such as storing inventory or taking preparedness actions that reduce the expected interruption length. In this study, we explore inventory, preparedness, and insurance in a two‐stage production chain that can experience disruptions at either the upstream or downstream stage. We analytically characterize an inventory‐only model and a preparedness‐only model in which the firm uses either inventory or preparedness effort to manage disruption risk, and a joint model in which the firm deploys both operational measures. We identify the relationships between the two operational measures within a stage and across the two stages. We also examine how insurance affects a firm's optimal deployment of and preference between the two operational measures. In addition to providing insights into the interaction of these three risk management measures, our results provide insights into the production chain design. For example, the firm can reduce its disruption risk management cost by allocating more production activity downstream (when possible) and this risk management benefit can, at times, outweigh the possible production cost increase associated with allocating more production downstream.