Mitigating supply disruption risks by diversifying competing suppliers and using sales effort

Supply chain disruption risk is a critical issue in supply chain management. In this study, we examine the problem of a retailer who can determine the sales promotion effort upon delivery to respond to suppliers’ disruption risk. The suppliers, who compete for business with the retailer by setting wholesale prices, can be independent or correlated in terms of disruption risk. We obtain the equilibrium of this Stackelberg–Nash game explicitly and perform sensitivity analyses in terms of the suppliers’ production costs, reliability levels, and their probability of full delivery. Counterintuitively, we show that a supplier’s order quantity may decrease in its reliability and, thus, the supplier can be worse off because of its higher reliability under certain conditions. However, when the suppliers are not strategic and wholesale prices are exogenous, a supplier always benefits from higher reliability. Moreover, in contrast to conventional wisdom, we show, by considering the costly sales effort of a retailer, that the suppliers do not always prefer negatively correlated disruption, compared to more positively correlated disruptions. Therefore, this study provides important implications for competing suppliers exposed to the risk of disruption when demand is dependent on sales effort.