Supply Disruptions, Asymmetric Information and a Backup Production Option

Ross School of Business Paper No. 1110

University of Michigan Industrial and Operations Engineering Technical Report No. 07-07

54 Pages Posted: 28 Nov 2007 Last revised: 3 Apr 2012

See all articles by Zhibin (Ben) Yang

Zhibin (Ben) Yang

University of Oregon - Lundquist College of Business

Goker Aydin

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Volodymyr Babich

McDonough School of Business, Georgetown University

Damian R. Beil

Stephen M. Ross School of Business

Date Written: April 2008

Abstract

We study a manufacturer that faces a supplier privileged with private information about supply disruptions. We investigate how risk-management strategies of the manufacturer change, and examine whether risk-management tools are more, or less, valuable, in the presence of such asymmetric information. We model a supply chain with one manufacturer and one supplier, in which the supplier's reliability is either high or low and is the supplier's private information. Upon disruption the supplier chooses between paying a penalty to the manufacturer for the shortfall and using backup production to fill the manufacturer's order. Using mechanism design theory, we derive the optimal contract menu offered by the manufacturer. We find that information asymmetry may cause the less reliable supplier type to stop using backup production while the more reliable supplier type continues to use it. Additionally, the manufacturer may stop ordering from the less reliable supplier type altogether. The value of backup production for the manufacturer is not necessarily larger under symmetric information and, for the more reliable supplier type, it could be negative . The manufacturer is willing to pay the most for information when backup production is moderately expensive. The value of information may increase as supplier types become uniformly more reliable. Thus, higher reliability need not be a substitute for better information.

Keywords: Supply Risk, Mechanism Design

JEL Classification: D24, D82, L14

Suggested Citation

Yang, Zhibin and Aydin, Goker and Babich, Volodymyr and Beil, Damian R., Supply Disruptions, Asymmetric Information and a Backup Production Option (April 2008). Ross School of Business Paper No. 1110, University of Michigan Industrial and Operations Engineering Technical Report No. 07-07, Available at SSRN: https://ssrn.com/abstract=1033170 or http://dx.doi.org/10.2139/ssrn.1033170

Zhibin Yang (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

Goker Aydin

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

Volodymyr Babich

McDonough School of Business, Georgetown University ( email )

3700 O Street, NW
Washington, DC 20057
United States

Damian R. Beil

Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

HOME PAGE: http://https://sites.google.com/a/umich.edu/damianbeil/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
309
Abstract Views
1,802
rank
108,420
PlumX Metrics