Sourcing Under Supply Uncertainty: Impact of Tariff and Shipping Cost

Posted: 4 Mar 2023

See all articles by Yulan Wang

Yulan Wang

Hong Kong Polytechnic University

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Jingwen Xu

Hong Kong Polytechnic University

Lei Chen

School of Management, Jinan University

Date Written: February 28, 2023

Abstract

Supplier diversification is often adopted to mitigate the negative impact of supply uncertainty and increased tariffs in global supply chains. In this study, we consider a decentralized global supply chain that consists of a domestic buyer, a reliable oversea supplier with a high tariff rate (e.g., a supplier located outside the free trade area), an unreliable oversea supplier with a low tariff rate (e.g., a supplier located in a free trade area), and a logistics service provider (LSP) that transports products from the oversea suppliers to the domestic buyer. We consider different combinations of trade agreements and tariff calculation schemes: First, based on who shall bear the costs of shipping and tariff, the buyer and the supplier can undertake one of the following three trade agreements: Ex Works (EXW), Delivered at Place (DAP), or Delivered Duty Paid (DDP). Second, depending on the basis of the dutiable value on which the tariff is calculated, two tariff calculation schemes, i.e., Free on Board (FOB) and Cost Insurance Freight (CIF), are considered. We fully solve the game of our three-tier decentralized supply chain, and characterize each member's preference about the aforementioned tariff agreements. Among other results, we find that, as the tariff rate increases, counter to our intuition, the buyer is more willing to bear the tariff and shipping cost. Interestingly, we also show that dual sourcing remains the equilibrium for the buyer under FOB, whereas single sourcing from the unreliable supplier located in a free trade area can emerge when CIF is adopted and the tariff rate is relatively high. Based on these findings, our paper proposes a short-term strategy associated with tariff adjustment and a long-term strategy with respect to trading term adjustment to help an import market keep business in its own free trade areas. Finally, we further investigate the impacts of introducing competition into the LSP market, and show that it benefits both the buyer and the reliable supplier, but may hurt the unreliable supplier when the tariff rate is high.

Keywords: Sourcing strategy, supply uncertainty, tariff rules, game theory

Suggested Citation

Wang, Yulan and Xiao, Guang and Xu, Jingwen and Chen, Lei, Sourcing Under Supply Uncertainty: Impact of Tariff and Shipping Cost (February 28, 2023). Available at SSRN: https://ssrn.com/abstract=4373270

Yulan Wang

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Guang Xiao (Contact Author)

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies ( email )

M634, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon
China

HOME PAGE: http://xiaog.weebly.com/

Jingwen Xu

Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon
Hong Kong

Lei Chen

School of Management, Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

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