Sourcing and supplying strategies under supply risk of critical components

Trade wars and geopolitical conflicts have intensified the supply risks associated with high-quality critical components in cross-border high-tech supply chains. In response, companies have restructured their supply networks by adopting multiple sourcing strategies and shifting from global to regional models. Consequently, domestic manufacturers reliant on overseas procurement may turn to low-quality domestic suppliers, while foreign suppliers may increase their provision of reliable medium-quality components to maintain market share. This paper examines the strategic supply decisions of a foreign supplier and the procurement strategies of a domestic manufacturer in a competitive market. Our findings reveal that these strategies are shaped by the interplay between diversification and competition effects. When the diversification effect outweighs the competition effect, the foreign supplier finds it profitable to increase the supply of medium-quality components. Conversely, if the competition effect is stronger, the foreign supplier refrains from doing so. It is beneficial for the domestic manufacturer to source low-end critical components, with the two effects becoming more pronounced when both low- and medium-quality critical components are available. However, when the foreign supplier expands its supply of medium-quality components, the foreign manufacturer faces adverse effects. Offering medium-quality products can erode the market share of high-quality products, whereas providing low-quality products may not have the same effect. Furthermore, we extend the basic model to incorporate demand uncertainty and demonstrate the robustness of our main findings.