Flexible strategies under supply disruption: the interplay between contingent sourcing and responsive pricing

Due to possible supply disruptions because of a low-cost unreliable supplier, a firm may use a high-cost reliable supplier as an additional regular supplier (dual sourcing) or an emergency backup supplier with an extra emergency cost (contingent sourcing). We consider the firm's sourcing problem when the pricing decision is made before any supply uncertainty is resolved (committed pricing) or after the supply state is realised (responsive pricing). By comparing the relative value of responsive pricing in contingent sourcing to that in dual sourcing, we study the relationship between contingent sourcing and responsive pricing in mitigating supply disruption risks. We show that the emergency cost and potential lost sales caused by disruption probability jointly impact the interplay of these two strategies. More specifically, when the emergency cost is low and the potential lost sales are lower under contingent sourcing than that under dual sourcing, contingent sourcing and responsive pricing are substitutes; otherwise, they are complements. Furthermore, we examine how disrupted capacity, i.e. the quantity that the unreliable supplier can deliver when disrupted, impacts the interplay, and find that the probability of the substitution relationship becomes higher when the disrupted capacity increases. We also find that under committed pricing, contingent sourcing is not optimal for any value of disruption probability when the emergency cost is high, a phenomenon that does not exist under responsive pricing.