Managing Disruption Risk in Multi-tier Supply Chains with Competition

We consider two multi-tier supply chains in the presence of disruption risk and chain-to-chain competition. Each chain consists of one manufacturer in competition, one supplier in Tier-1, and two suppliers prone to disruption in Tier-2. The manufacturer can influence the sourcing decisions of Tier-1 supplier through wholesale prices, which may lead to a significant overlap in Tier-2. We focus on two representative types of supply chain configuration: The V-shaped configuration has no overlap in Tier-2 while the U-shaped configuration has. First of all, we study the benchmark case without competition. We show that the manufacturer can use a low-price strategy (or high-price strategy) to induce its Tier-1 supplier for sole sourcing (or dual sourcing). Second, we study the chain-to-chain competition and derive the strategy equilibrium for manufacturers under each supply chain configuration. An interesting finding is that when the cost difference between low-price and high-price strategies is medium, the equilibrium is not unique and essentially different between V-shaped and U-shaped configurations. Finally, by comparing these two configurations, we show that the manufacturers have some strategy preferences; and that the overlapped structure in Tier-2 may be either beneficial or detrimental to both manufacturers.