Managing supply disruption through procurement strategy and price competition

Abstract

When facing supply disruptions, the emergency procurement strategy and the optimal allocation procurement strategy are widely used strategies to manage supply risks. In this paper, buyers use these types of procurement strategies under the threat of supply disruption and engage in price competition. The structural properties of the procurement strategies are characterised by their reliability thresholds. We find that reliability thresholds play a critical role in buyer procurement strategy choices, which are related to the sales price, underage cost and differentials in unit procurement cost. A solution procedure is proposed to determine the equilibrium strategy profile. The effects of reliability levels and costs on the equilibrium prices, expected profits and equilibrium strategy profiles are explored. We extend the basic model to investigate the case of symmetric competition where buyers can freely choose their procurement strategy. The results show that in most cases, the competing buyers will choose the same strategy, whether an optimal allocation strategy with single sourcing or an emergency procurement strategy with dual sourcing. In a special parameter setting, the buyers will choose either strategy because they yield identical expected profits; this leads to multiple equilibria. We also find the equilibrium to be Pareto efficient.