November  2020, 16(6): 3083-3103. doi: 10.3934/jimo.2019095

Effect of disruption risk on a supply chain with price-dependent demand

1. 

Department of Mathematics, East China University of Science and Technology, Shanghai 200237, China

2. 

The School of Management and Economics, The Chinese University of Hong Kong, Shenzhen 518172, China

3. 

School of Management, Fudan University, Shanghai 200433, China

* Corresponding author: Wei Wang

Received  December 2018 Revised  March 2019 Published  July 2019

Fund Project: This work is supported by National Nature Science Foundation of China (No.71531005)

Supply chain disruption management has been a hot issue for a long time. This paper studies a supply chain consisting of two suppliers and a retailer. The suppliers may have correlated disruption risks and they choose their respective wholesale price. The retailer's demand is selling price-dependent. In a scenario of ex-ante pricing scheme, i.e., the retailer chooses selling price before the suppliers' disruption is resolved, we find that the disruption correlation affects the supply chain members' profits in a nonmonotonic way. In a scenario of responsive pricing scheme, i.e., the retailer chooses selling price after the suppliers' disruption is resolved, we show that when the suppliers' disruption correlation becomes stronger, the suppliers' profit will decrease while the retailer's profit will increase. Moreover, the retailer always earns a higher profit under the responsive pricing scheme than under the ex-ante pricing scheme. In an extension, we show that the suppliers' disruption correlations affects the supply chain members' profits in a similar way if the supply chain has two competitive retailers. However, in this extension, if the suppliers' disruption correlation is low, the retailers' profit is higher under the responsive pricing scheme; otherwise, the retailers' profit is higher under the ex-ante pricing scheme.

Citation: Min Li, Jiahua Zhang, Yifan Xu, Wei Wang. Effect of disruption risk on a supply chain with price-dependent demand. Journal of Industrial & Management Optimization, 2020, 16 (6) : 3083-3103. doi: 10.3934/jimo.2019095
References:
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R. Anupindi and R. Akella, Diversification under supply uncertainty, Mgmt. Science, 39 (1993), 944-963.  doi: 10.1287/mnsc.39.8.944.  Google Scholar

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M. AzarmehrS. Rezapour and R. Tavakkoli-Moghaddam, Sourcing and pricing strategies for two retailers in a decentralized supply chain system under supply disruption, Mgmt. Science Letters, 2 (2012), 43-54.  doi: 10.5267/j.msl.2011.10.004.  Google Scholar

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V. BabichA. N. Burnetas and P. H. Ritchken, Competition and diversification effects in supply chains with supplier default risk, Manufacturing and Service Ops. Mgmt., 9 (2007), 123-146.   Google Scholar

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G. J. BurkeJ. E. Carrillo and A. J. Vakharia, Single versus multiple supplier sourcing strategies, European J. of Oper. Research, 182 (2007), 95-112.  doi: 10.1016/j.ejor.2006.07.007.  Google Scholar

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E. CaoC. Wan and M. Lai, Coordination of a supply chain with one manufacturer and multiple competing retailers under simultaneous demand and cost disruptions, Int. J. of Prod. Econ., 141 (2013), 425-433.   Google Scholar

[6]

J. Chen and Z. Guo, Strategic sourcing in the presence of uncertain supply and retail competition, Prod. and Ops. Mgmt., 23 (2015), 1748-1760.  doi: 10.1111/poms.12078.  Google Scholar

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M. DadaN. C. Petruzzi and L. B. Schwarz, A newsvendor's procurement problem when suppliers are unreliable, Manufacturing and Service Ops. Mgmt., 9 (2007), 9-32.  doi: 10.1287/msom.1060.0128.  Google Scholar

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S. R. DasD. Duffie and N. Kapadia, Common failings: How corporate defaults are correlated, J. of Finance, 62 (2007), 93-117.  doi: 10.3386/w11961.  Google Scholar

[9]

S. Deo and C. J. Corbett, Cournot competition under yield uncertainty: The case of the U.S. influenza vaccine market, Manufacturing and Service Ops. Mgmt., 11 (2009), 563-576.  doi: 10.1287/msom.1080.0242.  Google Scholar

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L. X. Dong, X. Guang and Y. Nan, Supply diversification under price dependent demand and random yield, SSRN Electronic Journal. doi: 10.2139/ssrn.2640635.  Google Scholar

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A. Federgruen and N. Yang, Optimal supply diversification under general supply risks, Operations Research, 57 (2009), 1451-1468.  doi: 10.1287/opre.1080.0667.  Google Scholar

[12]

A. Federgruen and N. Yang, Procurement strategies with unreliable suppliers, Ops. Research, 59 (2011), 1033-1039.  doi: 10.1287/opre.1110.0935.  Google Scholar

[13]

Q. Feng, Integrating dynamic pricing and replenishment decisions under supply capacity uncertainty, Mgmt. Science, 56 (2010), 2154-2172.  doi: 10.1287/mnsc.1100.1238.  Google Scholar

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B. C. Giri and S. Bardhan, Coordinating a supply chain under uncertain demand and random yield in presence of supply disruption, Int. J. of Prod. Research, 53 (2015), 5070-5084.  doi: 10.1080/00207543.2015.1030469.  Google Scholar

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J. Hongo and Y. Kubota, Disaster strands thousands in Japan, The Wall Street Journal, 2016. Google Scholar

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J. LiS. Wang and T. C. E. Cheng, Competition and cooperation in a single-retailer two-supplier supply chain with supply disruption, Int. J. of Prod. Econ., 124 (2010), 137-150.  doi: 10.1016/j.ijpe.2009.10.017.  Google Scholar

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Q. Li and S. Zheng, Joint inventory replenishment and pricing control for systems with uncertain yield and demand, Ops. Research, 54 (2006), 696-705.  doi: 10.1287/opre.1060.0273.  Google Scholar

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T. LiS. P. Sethi and J. Zhang, Supply diversification with responsive pricing, Prod. and Ops. Mgmt., 22 (2013), 447-458.   Google Scholar

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Z. LiS. M. Gilbert and G. Lai, Supplier encroachment under asymmetric information, Mgmt. Science, 60 (2013), 449-462.   Google Scholar

[20]

Lu cas and J. Douglas, Default correlation and credit analysis, J. of Fixed Income, 4 (2009), 76-87.   Google Scholar

[21]

Y. Merzifonluoglu and Y. Feng, Newsvendor problem with multiple unreliable suppliers, Int. J. of Prod. Research, 52 (2014), 221-242.  doi: 10.1080/00207543.2013.835497.  Google Scholar

[22]

N. C. Petruzzi and M. Dada, Pricing and the newsvendor problem: A review with extensions, Ops. Research, 47 (1999), 183-194.  doi: 10.1287/opre.47.2.183.  Google Scholar

[23]

L. Qi and Z. J. M. Shen, A supply chain design model with unreliable supply, Naval Research Logistics, 54 (2007), 829-844.  doi: 10.1002/nav.20255.  Google Scholar

[24]

J. Robertson and B. Levine, Sumitomo Epoxy resin plant gutted; IC firms scrambling, Electronic News, 39 (1993), 1-2.   Google Scholar

[25]

A. RoyS. S. Sana and K. Chaudhuri, Optimal pricing of competing retailers under uncertain demand-a two layer supply chain model, Annals of Ops. Research, 260 (2018), 481-500.  doi: 10.1007/s10479-015-1996-0.  Google Scholar

[26]

A. D. Servigny and O. Renault, Default correlation: Empirical evidence, Standard and Poor's Risk Solutions, (2002). Google Scholar

[27]

H. ShinD. A. Collier and D. D. Wilson, Supply management orientation and supplier/buyer performance, J. of Ops. Mgmt., 18 (2000), 317-333.  doi: 10.1016/S0272-6963(99)00031-5.  Google Scholar

[28]

D. P. SongJ. X. Dong and J. Xu, Integrated inventory management and supplier base reduction in a supply chain with multiple uncertainties, European J. of Oper. Research, 232 (2014), 522-536.  doi: 10.1016/j.ejor.2013.07.044.  Google Scholar

[29]

C. S. Tang, Perspectives in supply chain risk management, Int. J. of Prod. Econ., 103 (2006), 451-488.  doi: 10.1016/j.ijpe.2005.12.006.  Google Scholar

[30]

C. S. Tang, Responsive pricing under supply uncertainty, European J. of Oper. Research, 182 (2007), 239-255.  doi: 10.1016/j.ejor.2006.07.011.  Google Scholar

[31]

S. Y. Tang and P. Kouvelis, Supplier fiversification strategies in the presence of yield uncertainty and buyer competition, Manufacturing and Service Ops. Mgmt., 13 (2011), 439-451.   Google Scholar

[32]

B. Tomlin, On the value of mitigation and contingency strategies for managing supply chain disruption risks, Mgmt. Science, 52 (2006), 639-657.  doi: 10.1287/mnsc.1060.0515.  Google Scholar

[33]

Y. WangW. Gilland and B. Tomlin, Mitigating supply risk: Dual sourcing or process improvement?, Manufacturing and Service Ops. Mgmt., 12 (2010), 489-510.  doi: 10.1287/msom.1090.0279.  Google Scholar

[34]

T. M. Whitin, Inventory control and price theory, Mgmt. Science, 2 (1955), 61-68.  doi: 10.1287/mnsc.2.1.61.  Google Scholar

[35]

T. Xiao and Y. U. Gang, Supply chain disruption management and evolutionarily stable strategies of retailers in the quantity-setting duopoly situation with homogeneous goods, European J. of Oper. Research, 173 (2006), 648-668.  doi: 10.1016/j.ejor.2005.02.076.  Google Scholar

[36]

T. Xiao and X. Qi, Price competition, cost and demand disruptions and coordination of a supply chain with one manufacturer and two competing retailers, Omega, 36 (2008), 741-753.  doi: 10.1016/j.omega.2006.02.008.  Google Scholar

[37]

T. XiaoX. Qi and G. Yu, Coordination of supply chain after demand disruptions when retailers compete, Int. J. of Prod. Econ., 109 (2007), 162-179.  doi: 10.1016/j.ijpe.2006.11.013.  Google Scholar

[38]

T. XiaoG. YuZ. Sheng and Y. Xia, Coordination of a supply chain with one-manufacturer and two-retailers under demand promotion and disruption management decisions, Annals of Ops. Research, 135 (2005), 87-109.  doi: 10.1007/s10479-005-6236-6.  Google Scholar

[39]

H. YuA. Z. Zeng and L. Zhao, Single or dual sourcing: Decision-making in the presence of supply chain disruption risks, Omega, 37 (2009), 788-800.  doi: 10.1016/j.omega.2008.05.006.  Google Scholar

[40]

W. G. ZhangJ. FuH. Li and W. Xu, Coordination of supply chain with a revenue-sharing contract under demand disruptions when retailers compete, Int. J. of Prod. Econ., 138 (2012), 68-75.  doi: 10.1016/j.ijpe.2012.03.001.  Google Scholar

[41]

C. Zhou, An analysis of default correlations and multiple defaults, Review of Financial Studies, 14 (2001), 555-576.  doi: 10.1093/rfs/14.2.555.  Google Scholar

show all references

References:
[1]

R. Anupindi and R. Akella, Diversification under supply uncertainty, Mgmt. Science, 39 (1993), 944-963.  doi: 10.1287/mnsc.39.8.944.  Google Scholar

[2]

M. AzarmehrS. Rezapour and R. Tavakkoli-Moghaddam, Sourcing and pricing strategies for two retailers in a decentralized supply chain system under supply disruption, Mgmt. Science Letters, 2 (2012), 43-54.  doi: 10.5267/j.msl.2011.10.004.  Google Scholar

[3]

V. BabichA. N. Burnetas and P. H. Ritchken, Competition and diversification effects in supply chains with supplier default risk, Manufacturing and Service Ops. Mgmt., 9 (2007), 123-146.   Google Scholar

[4]

G. J. BurkeJ. E. Carrillo and A. J. Vakharia, Single versus multiple supplier sourcing strategies, European J. of Oper. Research, 182 (2007), 95-112.  doi: 10.1016/j.ejor.2006.07.007.  Google Scholar

[5]

E. CaoC. Wan and M. Lai, Coordination of a supply chain with one manufacturer and multiple competing retailers under simultaneous demand and cost disruptions, Int. J. of Prod. Econ., 141 (2013), 425-433.   Google Scholar

[6]

J. Chen and Z. Guo, Strategic sourcing in the presence of uncertain supply and retail competition, Prod. and Ops. Mgmt., 23 (2015), 1748-1760.  doi: 10.1111/poms.12078.  Google Scholar

[7]

M. DadaN. C. Petruzzi and L. B. Schwarz, A newsvendor's procurement problem when suppliers are unreliable, Manufacturing and Service Ops. Mgmt., 9 (2007), 9-32.  doi: 10.1287/msom.1060.0128.  Google Scholar

[8]

S. R. DasD. Duffie and N. Kapadia, Common failings: How corporate defaults are correlated, J. of Finance, 62 (2007), 93-117.  doi: 10.3386/w11961.  Google Scholar

[9]

S. Deo and C. J. Corbett, Cournot competition under yield uncertainty: The case of the U.S. influenza vaccine market, Manufacturing and Service Ops. Mgmt., 11 (2009), 563-576.  doi: 10.1287/msom.1080.0242.  Google Scholar

[10]

L. X. Dong, X. Guang and Y. Nan, Supply diversification under price dependent demand and random yield, SSRN Electronic Journal. doi: 10.2139/ssrn.2640635.  Google Scholar

[11]

A. Federgruen and N. Yang, Optimal supply diversification under general supply risks, Operations Research, 57 (2009), 1451-1468.  doi: 10.1287/opre.1080.0667.  Google Scholar

[12]

A. Federgruen and N. Yang, Procurement strategies with unreliable suppliers, Ops. Research, 59 (2011), 1033-1039.  doi: 10.1287/opre.1110.0935.  Google Scholar

[13]

Q. Feng, Integrating dynamic pricing and replenishment decisions under supply capacity uncertainty, Mgmt. Science, 56 (2010), 2154-2172.  doi: 10.1287/mnsc.1100.1238.  Google Scholar

[14]

B. C. Giri and S. Bardhan, Coordinating a supply chain under uncertain demand and random yield in presence of supply disruption, Int. J. of Prod. Research, 53 (2015), 5070-5084.  doi: 10.1080/00207543.2015.1030469.  Google Scholar

[15]

J. Hongo and Y. Kubota, Disaster strands thousands in Japan, The Wall Street Journal, 2016. Google Scholar

[16]

J. LiS. Wang and T. C. E. Cheng, Competition and cooperation in a single-retailer two-supplier supply chain with supply disruption, Int. J. of Prod. Econ., 124 (2010), 137-150.  doi: 10.1016/j.ijpe.2009.10.017.  Google Scholar

[17]

Q. Li and S. Zheng, Joint inventory replenishment and pricing control for systems with uncertain yield and demand, Ops. Research, 54 (2006), 696-705.  doi: 10.1287/opre.1060.0273.  Google Scholar

[18]

T. LiS. P. Sethi and J. Zhang, Supply diversification with responsive pricing, Prod. and Ops. Mgmt., 22 (2013), 447-458.   Google Scholar

[19]

Z. LiS. M. Gilbert and G. Lai, Supplier encroachment under asymmetric information, Mgmt. Science, 60 (2013), 449-462.   Google Scholar

[20]

Lu cas and J. Douglas, Default correlation and credit analysis, J. of Fixed Income, 4 (2009), 76-87.   Google Scholar

[21]

Y. Merzifonluoglu and Y. Feng, Newsvendor problem with multiple unreliable suppliers, Int. J. of Prod. Research, 52 (2014), 221-242.  doi: 10.1080/00207543.2013.835497.  Google Scholar

[22]

N. C. Petruzzi and M. Dada, Pricing and the newsvendor problem: A review with extensions, Ops. Research, 47 (1999), 183-194.  doi: 10.1287/opre.47.2.183.  Google Scholar

[23]

L. Qi and Z. J. M. Shen, A supply chain design model with unreliable supply, Naval Research Logistics, 54 (2007), 829-844.  doi: 10.1002/nav.20255.  Google Scholar

[24]

J. Robertson and B. Levine, Sumitomo Epoxy resin plant gutted; IC firms scrambling, Electronic News, 39 (1993), 1-2.   Google Scholar

[25]

A. RoyS. S. Sana and K. Chaudhuri, Optimal pricing of competing retailers under uncertain demand-a two layer supply chain model, Annals of Ops. Research, 260 (2018), 481-500.  doi: 10.1007/s10479-015-1996-0.  Google Scholar

[26]

A. D. Servigny and O. Renault, Default correlation: Empirical evidence, Standard and Poor's Risk Solutions, (2002). Google Scholar

[27]

H. ShinD. A. Collier and D. D. Wilson, Supply management orientation and supplier/buyer performance, J. of Ops. Mgmt., 18 (2000), 317-333.  doi: 10.1016/S0272-6963(99)00031-5.  Google Scholar

[28]

D. P. SongJ. X. Dong and J. Xu, Integrated inventory management and supplier base reduction in a supply chain with multiple uncertainties, European J. of Oper. Research, 232 (2014), 522-536.  doi: 10.1016/j.ejor.2013.07.044.  Google Scholar

[29]

C. S. Tang, Perspectives in supply chain risk management, Int. J. of Prod. Econ., 103 (2006), 451-488.  doi: 10.1016/j.ijpe.2005.12.006.  Google Scholar

[30]

C. S. Tang, Responsive pricing under supply uncertainty, European J. of Oper. Research, 182 (2007), 239-255.  doi: 10.1016/j.ejor.2006.07.011.  Google Scholar

[31]

S. Y. Tang and P. Kouvelis, Supplier fiversification strategies in the presence of yield uncertainty and buyer competition, Manufacturing and Service Ops. Mgmt., 13 (2011), 439-451.   Google Scholar

[32]

B. Tomlin, On the value of mitigation and contingency strategies for managing supply chain disruption risks, Mgmt. Science, 52 (2006), 639-657.  doi: 10.1287/mnsc.1060.0515.  Google Scholar

[33]

Y. WangW. Gilland and B. Tomlin, Mitigating supply risk: Dual sourcing or process improvement?, Manufacturing and Service Ops. Mgmt., 12 (2010), 489-510.  doi: 10.1287/msom.1090.0279.  Google Scholar

[34]

T. M. Whitin, Inventory control and price theory, Mgmt. Science, 2 (1955), 61-68.  doi: 10.1287/mnsc.2.1.61.  Google Scholar

[35]

T. Xiao and Y. U. Gang, Supply chain disruption management and evolutionarily stable strategies of retailers in the quantity-setting duopoly situation with homogeneous goods, European J. of Oper. Research, 173 (2006), 648-668.  doi: 10.1016/j.ejor.2005.02.076.  Google Scholar

[36]

T. Xiao and X. Qi, Price competition, cost and demand disruptions and coordination of a supply chain with one manufacturer and two competing retailers, Omega, 36 (2008), 741-753.  doi: 10.1016/j.omega.2006.02.008.  Google Scholar

[37]

T. XiaoX. Qi and G. Yu, Coordination of supply chain after demand disruptions when retailers compete, Int. J. of Prod. Econ., 109 (2007), 162-179.  doi: 10.1016/j.ijpe.2006.11.013.  Google Scholar

[38]

T. XiaoG. YuZ. Sheng and Y. Xia, Coordination of a supply chain with one-manufacturer and two-retailers under demand promotion and disruption management decisions, Annals of Ops. Research, 135 (2005), 87-109.  doi: 10.1007/s10479-005-6236-6.  Google Scholar

[39]

H. YuA. Z. Zeng and L. Zhao, Single or dual sourcing: Decision-making in the presence of supply chain disruption risks, Omega, 37 (2009), 788-800.  doi: 10.1016/j.omega.2008.05.006.  Google Scholar

[40]

W. G. ZhangJ. FuH. Li and W. Xu, Coordination of supply chain with a revenue-sharing contract under demand disruptions when retailers compete, Int. J. of Prod. Econ., 138 (2012), 68-75.  doi: 10.1016/j.ijpe.2012.03.001.  Google Scholar

[41]

C. Zhou, An analysis of default correlations and multiple defaults, Review of Financial Studies, 14 (2001), 555-576.  doi: 10.1093/rfs/14.2.555.  Google Scholar

Figure 1.  Influence of the default correlation under the ex-ante pricing scheme of the single retailer
Figure 2.  Ex-ante pricing scheme vs. responsive pricing scheme in the basic model
Figure 3.  Influence of the default correlation under the ex-ante pricing scheme of the two retailers
Figure 4.  Impact of the demand sensitivity under the ex-ante pricing scheme of the two retailers
Figure 5.  Impact of the demand sensitivity under the responsive pricing scheme of the two retailers
Figure 6.  Ex-ante pricing scheme vs. responsive pricing scheme in the model of the two retailers
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