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Competition and Diversification Effects in Supply Chains with Supplier Default Risk

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Author Info

  • Volodymyr Babich

    ()
    (Industrial and Operations Engineering Department, University of Michigan, Ann Arbor, Michigan 48109)

  • Apostolos N. Burnetas

    ()
    (Department of Mathematics, University of Athens, Athens, Greece)

  • Peter H. Ritchken

    ()
    (Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

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    Abstract

    We study the effects of disruption risk in a supply chain where one retailer deals with competing risky suppliers who may default during their production lead times. The suppliers, who compete for business with the retailer by setting wholesale prices, are leaders in a Stackelberg game with the retailer. The retailer, facing uncertain future demand, chooses order quantities while weighing the benefits of procuring from the cheapest supplier against the advantages of order diversification. For the model with two suppliers, we show that low supplier default correlations dampen competition among the suppliers, increasing the equilibrium wholesale prices. Therefore the retailer prefers suppliers with highly correlated default events, despite the loss of diversification benefits. In contrast, the suppliers and the channel prefer defaults that are negatively correlated. However, as the number of suppliers increases, our model predicts that the retailer may be able to take advantage of both competition and diversification.

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    File URL: http://dx.doi.org/10.1287/msom.1060.0122
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    Bibliographic Info

    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 9 (2007)
    Issue (Month): 2 (October)
    Pages: 123-146

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    Handle: RePEc:inm:ormsom:v:9:y:2007:i:2:p:123-146

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    Related research

    Keywords: resilient supply chains; supply risk; supply disruptions; competition; procurement; default correlation; equilibrium pricing;

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    Cited by:
    1. Cheong, Taesu & Song, Sang Hwa, 2013. "The value of information on supply risk under random yields," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 60(C), pages 27-38.
    2. Wagner, Stephan M. & Neshat, Nikrouz, 2010. "Assessing the vulnerability of supply chains using graph theory," International Journal of Production Economics, Elsevier, vol. 126(1), pages 121-129, July.
    3. Nasr, Walid W. & Maddah, Bacel & Salameh, Moueen K., 2013. "EOQ with a correlated binomial supply," International Journal of Production Economics, Elsevier, vol. 144(1), pages 248-255.
    4. Qi, Lian, 2013. "A continuous-review inventory model with random disruptions at the primary supplier," European Journal of Operational Research, Elsevier, vol. 225(1), pages 59-74.
    5. Wang, Yimin & Xiao, Yixuan & Yang, Nan, 2014. "Improving reliability of a shared supplier with competition and spillovers," European Journal of Operational Research, Elsevier, vol. 236(2), pages 499-510.
    6. Lu, Mengshi & Huang, Simin & Shen, Zuo-Jun Max, 2011. "Product substitution and dual sourcing under random supply failures," Transportation Research Part B: Methodological, Elsevier, vol. 45(8), pages 1251-1265, September.
    7. Li, Jian & Wang, Shouyang & Cheng, T.C.E., 2010. "Competition and cooperation in a single-retailer two-supplier supply chain with supply disruption," International Journal of Production Economics, Elsevier, vol. 124(1), pages 137-150, March.
    8. Blome, Constantin & Schoenherr, Tobias, 2011. "Supply chain risk management in financial crises--A multiple case-study approach," International Journal of Production Economics, Elsevier, vol. 134(1), pages 43-57, November.
    9. Yim, Andrew, 2010. "Quality Cost and Failure Risk in the Choice of Single versus Multiple Sourcing," MPRA Paper 27858, University Library of Munich, Germany.
    10. Serel, Dogan A., 2008. "Inventory and pricing decisions in a single-period problem involving risky supply," International Journal of Production Economics, Elsevier, vol. 116(1), pages 115-128, November.
    11. Wagner, Stephan M. & Bode, Christoph & Koziol, Philipp, 2011. "Negative default dependence in supplier networks," International Journal of Production Economics, Elsevier, vol. 134(2), pages 398-406, December.

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