Supplier diversification strategies in the presence of yield uncertainty and buyer competition

Sammi Yu Tang, Panos Kouvelis

Research output: Contribution to journalArticle

67 Scopus citations

Abstract

The benefits of supplier diversification are well established for price-taking firms. In this paper, we investigate the benefits from supplier diversification for dual-sourcing duopolists. We consider a two-echelon supply chain in which suppliers sell components to buyers who produce and sell substitutable products. The suppliers' output processes are uncertain and modeled as having a proportional random yield. Buyers engage in a quantity-based Cournot competition. We find that an increase in supplier correlation leads to more correlated buyers' outputs and a decrease in their profits. In the presence of end-market competition, dual sourcing still brings value by reducing the inefficiency caused by random yield: Namely, when the suppliers' yield processes are strongly negatively correlated, dual sourcing increases the expected market output and improves the firms' profits over sole sourcing. However, unlike a monopolist firm, a duopolist does not necessarily allocate its supplier orders to minimize output variability. We generalize the main results to a two-stage order-quantity-output-quantity game and to one with asymmetric suppliers.

Original languageEnglish (US)
Pages (from-to)439-451
Number of pages13
JournalManufacturing and Service Operations Management
Volume13
Issue number4
DOIs
StatePublished - Sep 1 2011

Keywords

  • Cournot competition
  • Dual sourcing
  • Equilibrium
  • Random yield
  • Supply uncertainty

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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