Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition

Production and Operations Management, 23(10), 1748-1760, 2014.

Posted: 5 Jan 2014 Last revised: 2 May 2015

See all articles by Jianqing Chen

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Zhiling Guo

Singapore Management University - School of Information Systems

Date Written: January 18, 2013

Abstract

This study develops an analytical model to evaluate competing retail firms’ sourcing strategies in the presence of supply uncertainty. We consider a common supplier that sells its uncertain supply to two downstream retail firms engaging in price competition in a horizontally differentiated product market. The focal firm has a dual-sourcing option, while the rival firm can only source from the common supplier. We assess the system-wide effects of supply uncertainty on the focal firm’s incentive to pursue the dual-sourcing strategy. We find that the focal firm’s dual-sourcing strategy can create a win-win situation that leads to increased retail prices and expected profits for both firms. Furthermore, under certain conditions, we show that it is beneficial for the focal firm to strategically source from the common supplier, even if its alternative supplier offers a lower wholesale price. Overall, we identify two types of incentives for adopting the dual-sourcing strategy: the incentive of mitigating supply risk through supplier diversification and the incentive of strategic sourcing for more effective retail competition.

Keywords: dual sourcing, supply uncertainty, uniform allocation, price competition, supply chain

Suggested Citation

Chen, Jianqing and Guo, Zhiling, Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition (January 18, 2013). Production and Operations Management, 23(10), 1748-1760, 2014.. Available at SSRN: https://ssrn.com/abstract=2374752

Jianqing Chen (Contact Author)

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Zhiling Guo

Singapore Management University - School of Information Systems ( email )

80 Stamford Road
Singapore, 178902
Singapore

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