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Disruption risk and optimal sourcing in multitier supply networks

Publication ,  Journal Article
Ang, E; Iancu, DA; Swinney, R
Published in: Management Science
August 1, 2017

We study sourcing in a supply chain with three levels: a manufacturer, tier 1 suppliers, and tier 2 suppliers prone to disruption from, e.g., natural disasters such as earthquakes or floods. The manufacturer may not directly dictate which tier 2 suppliers are used but may influence the sourcing decisions of tier 1 suppliers via contract parameters. The manufacturer's optimal strategy depends critically on the degree of overlap in the supply chain: if tier 1 suppliers share tier 2 suppliers, resulting in a "diamond-shaped" supply chain, the manufacturer relies less on direct mitigation (procuring excess inventory and multisourcing in tier 1) and more on indirect mitigation (inducing tier 1 suppliers to mitigate disruption risk). We also show that while the manufacturer always prefers less overlap, tier 1 suppliers may prefer a more overlapped supply chain and hence may strategically choose to form a diamond-shaped supply chain. This preference conflict worsens as the manufacturer's profit margin increases, as disruptions become more severe, and as unreliable tier 2 suppliers become more heterogeneous in their probability of disruption however, penalty contracts-in which the manufacturer penalizes tier 1 suppliers for a failure to deliver ordered units-alleviate this coordination problem.

Duke Scholars

Published In

Management Science

DOI

EISSN

1526-5501

ISSN

0025-1909

Publication Date

August 1, 2017

Volume

63

Issue

8

Start / End Page

2397 / 2419

Related Subject Headings

  • Operations Research
  • 46 Information and computing sciences
  • 38 Economics
  • 35 Commerce, management, tourism and services
  • 15 Commerce, Management, Tourism and Services
  • 08 Information and Computing Sciences
 

Citation

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Ang, E., Iancu, D. A., & Swinney, R. (2017). Disruption risk and optimal sourcing in multitier supply networks. Management Science, 63(8), 2397–2419. https://doi.org/10.1287/mnsc.2016.2471
Ang, E., D. A. Iancu, and R. Swinney. “Disruption risk and optimal sourcing in multitier supply networks.” Management Science 63, no. 8 (August 1, 2017): 2397–2419. https://doi.org/10.1287/mnsc.2016.2471.
Ang E, Iancu DA, Swinney R. Disruption risk and optimal sourcing in multitier supply networks. Management Science. 2017 Aug 1;63(8):2397–419.
Ang, E., et al. “Disruption risk and optimal sourcing in multitier supply networks.” Management Science, vol. 63, no. 8, Aug. 2017, pp. 2397–419. Scopus, doi:10.1287/mnsc.2016.2471.
Ang E, Iancu DA, Swinney R. Disruption risk and optimal sourcing in multitier supply networks. Management Science. 2017 Aug 1;63(8):2397–2419.

Published In

Management Science

DOI

EISSN

1526-5501

ISSN

0025-1909

Publication Date

August 1, 2017

Volume

63

Issue

8

Start / End Page

2397 / 2419

Related Subject Headings

  • Operations Research
  • 46 Information and computing sciences
  • 38 Economics
  • 35 Commerce, management, tourism and services
  • 15 Commerce, Management, Tourism and Services
  • 08 Information and Computing Sciences