Title

Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition

Publication Type

Journal Article

Publication Date

2014

Abstract

This paper develops an analytical model to evaluate competing retail firms’ sourcing strategies in the presence of supply uncertainty. We consider a common supplier that sells its uncertain supply to two downstream retail firms engaging in price competition in a horizontally differentiated product market. The focal firm has a dual-sourcing option, while the rival firm can only source from the common supplier. We assess the system-wide effects of supply uncertainty on the focal firm's incentive to pursue the dual-sourcing strategy. We find that the focal firm's dual-sourcing strategy can create a win-win situation that leads to increased retail prices and expected profits for both firms. Furthermore, under certain conditions, we show that it is beneficial for the focal firm to strategically source from the common supplier, even if its alternative supplier offers a lower wholesale price. Overall, we identify two types of incentives for adopting the dual-sourcing strategy: the incentive of mitigating supply risk through supplier diversification and the incentive of strategic sourcing for more effective retail competition.

Keywords

dual sourcing, supply uncertainty, uniform allocation, price competition, supply chain

Discipline

Computer Sciences | Operations and Supply Chain Management

Research Areas

Information Systems and Management

Publication

Production and Operations Management

Volume

23

Issue

10

First Page

1748

Last Page

1760

ISSN

1059-1478

Identifier

10.1111/poms.12078

Publisher

Wiley

Additional URL

http://dx.doi.org/10.1111/poms.12078