Multisourcing and miscoordination in supply chain networks

Kostas Bimpikis*, Douglas Fearing, Alireza Tahbaz-Salehi

*Corresponding author for this work

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

This paper studies sourcing decisions of firms in a multitier supply chain when procurement is subject to disruption risk. We argue that features of the production process that are commonly encountered in practice (including differential production technologies and financial constraints) may result in the formation of inefficient supply chains, owing to the misalignment of the sourcing incentives of firms at different tiers. We provide a characterization of the conditions under which upstream suppliers adopt sourcing strategies that are suboptimal from the perspective of firms further downstream. Our analysis highlights that a focus on optimizing procurement decisions in each tier of the supply chain in isolation may not be sufficient for mitigating risks at an aggregate level. Rather, we argue that a holistic view of the entire supply network is necessary to properly assess and secure against disruptive events. Importantly, the misalignment we identify does not originate from cost or reliability asymmetries. Rather, firms' sourcing decisions are driven by the interplay of the firms' risk considerations with nonconvexities in the production process. This implies that bilateral contracts that could involve under-delivery penalties may be insufficient to align incentives.

Original languageEnglish (US)
Pages (from-to)1023-1039
Number of pages17
JournalOperations Research
Volume66
Issue number4
DOIs
StatePublished - Jul 1 2018

Keywords

  • Disruption risk
  • Multisourcing
  • Supply chain networks

ASJC Scopus subject areas

  • Computer Science Applications
  • Management Science and Operations Research

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