Strategic Dual Sourcing: How Product Imperfection and Consumer Disappointment Shape Profitability？

Abstract

Numerous brands confronting consumers’ heterogeneous utility are adopting a novel strategy referred to as “Dual Sourcing with Inherent Product Uncertainty” (DSPU Strategy hereafter), under which the components are sourced from different suppliers but are interchangeably used in production. The brand sells final products to consumers by disclosing the mixed-use of components rather than the specific component source. Clearly, dual sourcing may induce supply competition and then reduce the procurement cost, consumers’ utility may be further hurt because of the disappointment when they receive products containing low-quality components. We hence examine whether it is really beneficial for a brand to adopt DSPU Strategy and if the answer is “yes”, under what conditions. Interestingly, we find that the value of DSPU Strategy is beyond procurement cost reduction, but the flexibility to determine the procurement proportions allocated to competing suppliers.  We further reveal that an increasing procurement proportion of high-quality components may lower consumers’ overall expected value, particularly when they are highly sensitive about products with low-quality component (referred to as Consumers’ Utility Paradox in this paper). Therefore, when product differentiation is strengthened and product competition is softened—either due to the use of low-quality components or consumers’ significant aversion towards disappointment—brands will be more inclined to favor DSPU Strategy. Our results are robust when the high-quality component suffers from either supply capacity constraint and/or supply disruption risk.

Keywords: Dual sourcing; Probabilistic selling; Quality competition; Purchasing strategy; Consumer disappointment

JEL Classification: M11; M31