Procurement decisions and information sharing under multi-tier disruption risk in a supply chain

Abstract

We consider a manufacturer's procurement decision in a three-tier supply chain (SC) under disruption risk. The manufacturer sources components from a single first-tier supplier (FT). The FT, in turn, sources raw materials from a single second-tier supplier (ST). Suppliers in both tiers are unreliable, i.e. prone to disruption risk. Increasing SC visibility through information sharing is a potential disruption management strategy for the manufacturer. While the manufacturer can obtain disruption risk information for the FT, disruption risk information for the ST is not easily accessible to the manufacturer except through the FT, who may not be willing to share ST information. We study different mechanisms under which the manufacturer can obtain ST information, and its impact on manufacturer's and FT's decisions and potential profits. We show that information sharing makes the manufacturer's procurement decisions more conservative, i.e. carrying more inventories, but the FT's procurement decision is contingent on the ST's reliability; more proactive (conservative) when ST is unreliable (reliable), i.e. carrying less (more) inventories. We demonstrate that there are two ways to induce the FT to share its information, and numerically show that their effectiveness is contingent on multiple factors, including FT and ST reliabilities and information sharing costs.