Supply Disruption in Multi-Tier Supply Chains: Competition and Network Configuration

Abstract

We study the impact of disruption on both centralized and decentralized supply chain networks, considering the position of disruption and/or network incompleteness. Our model is a three-tier supply chain network with two firms in each tier. The firms buy from their upstream supplier(s) and produce for the downstream buyer(s). Either a tier-1 or a tier-2 supplier of tier-0 firms is susceptible to disruption risk. The network between any two tiers could be incomplete, meaning that a link is missing. We solve optimal (equilibrium) production quantities of the centralized (decentralized) supply chain. Meanwhile, we compare the profits and outputs of the supply chains under different disruption positions and network configurations. For a complete network, the centralized supply chain always generates a higher profit under tier-2 disruption than under tier-1 disruption; this result reverses in the decentralized supply chain if the disruption probability is high and the external procurement cost is low. For both the centralized and decentralized supply chains in an incomplete network, we find that the incompleteness of the network amplifies the negative impact of disruption. Moreover, when tier-1 is unreliable, the centralized supply chain generates a higher profit when the upstream network is incomplete than when the downstream network is incomplete. This result can be reversed in the decentralized supply chain with a high disruption probability. We also examine the output variability of the supply chains under different disruption positions and network configurations. Our results show that firms with different levels of vertical integration may need to invest their limited risk management resources and build flexible sourcing relationships in different tiers of their supply chain, in particular, when disruption risk is high.

Keywords: supply chain, networks, disruption