Competition and Diversification Effects in Supply Chains with Supplier Default Risk

Manufacturing & Service Operations Management

Posted: 22 May 2006

See all articles by Volodymyr Babich

Volodymyr Babich

McDonough School of Business, Georgetown University

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

Apostolos Burnetas

National and Kapodistrian University of Athens - Faculty of Mathematics

Abstract

We study the effects of disruption risk in a supply chain where one retailer deals with competing risky suppliers who may default during their production lead-times. The suppliers, who compete for business with the retailer by establishing wholesale prices, are leaders in a Stackelberg game with the retailer. The retailer, facing uncertain future demand, chooses order quantities while weighing the benefits of procuring from the cheapest supplier against the advantages of order diversification. For the model with two suppliers we show that low supplier default correlations dampens competition among the suppliers, increasing the equilibrium wholesale prices. Therefore, the retailer prefers suppliers with highly correlated default events, despite the loss of diversification benefits. In contrast, the suppliers and the channel prefer defaults that are negatively correlated. However, as the number of suppliers increases our model predicts that the retailer may be able to take advantage of both competition and diversification.

Keywords: Resilient supply chains, supply risk, supply disruptions, competition

JEL Classification: A10, C60, C79

Suggested Citation

Babich, Volodymyr and Ritchken, Peter H. and Burnetas, Apostolos, Competition and Diversification Effects in Supply Chains with Supplier Default Risk. Manufacturing & Service Operations Management. Available at SSRN: https://ssrn.com/abstract=903773 or http://dx.doi.org/10.2139/ssrn.903773

Volodymyr Babich (Contact Author)

McDonough School of Business, Georgetown University ( email )

3700 O Street, NW
Washington, DC 20057
United States

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

Apostolos Burnetas

National and Kapodistrian University of Athens - Faculty of Mathematics ( email )

GR-157 84, Athens
Greece

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