Dual sourcing under suppliers' capacity investments

Abstract

Dual sourcing is used by various firms as an effective strategy to mitigate supply chain risks. In this paper, we model a supply chain, where two upstream suppliers compete by investing in capacity to fulfill a buyer's requirement, and to serve their individual alternative markets. The suppliers' capacity investment outcomes face uncertainties in terms of final production cost and final plant capacity. We formulate a simultaneous game situation where a buyer allocates its sourcing requirements among two suppliers. We find below a certain threshold value on the mean of suppliers' capacity, the suppliers increase their capacity investment as mean of production capacity increases. Above this threshold value, the suppliers decrease the capacity investments with the increase in mean production capacity. Next, we find that an increase in the variability of suppliers' capacity decreases the suppliers' investments. Our analysis also reveals that as the mean of production cost increases, the suppliers decreases their capacity investments. As the variability in the suppliers' production cost increases, we find their capacity investment decisions do not change much. We also find that under different conditions the buyer may use different sourcing structures: symmetric dual sourcing strategy (sourcing equal capacities from all the suppliers), asymmetric dual sourcing strategy (sourcing positive but unequal capacities from all the suppliers) and single sourcing (sourcing completely from a single supplier). Later, in the paper, we also explore the impact of scale economies due to plant size and the scale economies associated with the total output produced.