Managing disruption risk in competing multitier supply chains

This paper studies the sourcing problem of two competing manufacturers in two supply chains. Each supply chain consists of a Tier 0 manufacturer, a Tier 1 supplier, and a pair of Tier 2 suppliers with different disruption probabilities. The two manufacturers are engaged in Cournot competition. The two Tier 1 suppliers that serve different manufacturers may procure from different or the same Tier 2 suppliers. We investigate the impact of upstream supply chain structures on the manufacturers' performance by comparing two representative configurations: the paralleled supply chain configuration, which has no overlap in Tier 2 suppliers, and the overlapped supply chain configuration, which has the same Tier 2 suppliers. We derive the manufacturers' equilibrium sourcing strategies in the two configurations. When the more reliable Tier 2 supplier is quite reliable or the more unreliable Tier 2 supplier is very unreliable, both manufacturers offer a low wholesale price to induce their Tier 1 suppliers for single sourcing. When the more reliable Tier 2 supplier is not sufficiently reliable and the more unreliable Tier 2 supplier is not that unreliable, both manufacturers offer a high wholesale price to induce their Tier 1 suppliers for dual sourcing. There are also certain conditions under which one manufacturer chooses the high-price sourcing strategy and the other one chooses the low-price sourcing strategy. Besides, we demonstrate that competition decreases the manufacturers' incentives to induce dual sourcing. In a more competitive market, the manufacturers prefer less overlap in their upper suppliers. Finally, we conduct several extensions to show the robustness of our findings.