Subsidization or Diversification? Mitigating Supply Disruption with Manufacturer Information Sharing

With emergencies occurring frequently nowadays, supply disruption has become a potential threat to firms’ operations and supply chain sustainability. To mitigate supply disruptions, downstream manufacturers increasingly provide subsidization for improving supply reliability or implement diversification by employing a dual sourcing strategy. Under either strategy, we consider a supply chain in which a manufacturer with private demand information decides whether to share such information with an upstream supplier, whereas the supplier improves the supply reliability level. Contrary to conventional wisdom, we reveal that the manufacturer may have an incentive to share information with the supplier, and such information sharing can improve the supply reliability. Our results further indicate that when the reliability improvement efficiency is low, the manufacturer prefers diversification. In this situation, with a decrease in reliability improvement efficiency, she also shares the demand information. When the reliability improvement efficiency is medium, the manufacturer forgoes the subsidization and diversification strategies and only shares the demand information. When the reliability improvement efficiency is high and subsidy fraction is low, the manufacturer prefers to provide subsidy to help the supplier overcome the cost on improving reliability (subsidization). In this case, she keeps the demand information to avoid an aggressive wholesale price. We also extend our analysis to the scenario when the manufacturer is allowed to adopt both subsidization and diversification. Interestingly, such combined strategy may even undermine the manufacturer's profit.