Role of random capacity risk and the retailer in decentralized supply chains with competing suppliers

Fei Qin, Uday S. Rao, Haresh Gurnani, Ramesh Bollapragada

Research output: Contribution to journalArticle

16 Scopus citations

Abstract

This research considers a supply chain under the following conditions: (i) two heterogeneous suppliers are in competition, (ii) supply capacity is random and pricing is endogenous, (iii) consumer demand, with and without an intermediate retailer, is price dependent. Specifically, we examine how uncertainty in supply capacity affects optimal ordering and pricing decisions, supplier and retailer profits, and the incentives to reduce such uncertainty. When two suppliers sell through a monopolistic retailer, supply uncertainty not only affects the retailer's diversification strategy for replenishment, but also changes the suppliers' wholesale price competition and the incentive for reducing capacity uncertainty. In this dual-sourcing model, we show that the benefit of reducing capacity uncertainty depends on the cost heterogeneity between the suppliers. In addition, we show that a supplier does not necessarily benefit from capacity variability reduction. We contrast this incentive misalignment with findings from the single-supplier case and a supplier-duopoly case where both suppliers sell directly to market without the monopolistic retailer. In the latter single-supplier and duopoly cases, we prove that the unreliable supplier always benefits from reducing capacity variability. These results highlight the role of the retailer's diversification strategy in distorting a supplier's incentive for reducing capacity uncertainty under supplier price competition.

Original languageEnglish (US)
Pages (from-to)255-279
Number of pages25
JournalDecision Sciences
Volume45
Issue number2
DOIs
StatePublished - Apr 2014

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Keywords

  • Capacity management
  • Contracts and incentives
  • Supply chain risk

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Information Systems and Management
  • Management of Technology and Innovation

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