Multi-Sourcing

This paper studies multi-tier supply chain networks in the presence of disruption risk. Firms decide how to source their inputs from upstream suppliers so as to maximize their expected profits, and prices of intermediate goods are set so that markets clear. We provide an explicit characterization of equilibrium prices and profits, which allows us to derive insights into how the network structure, i.e., the number of firms in each tier, production costs, and disruption risk, affect firms’ profits. Also, we consider supply chains that are formed endogenously and argue that endogenous entry leads to chains that are inefficient in terms of the number of firms that engage in production.

This paper studies sourcing decisions of firms in a multi-tier supply chain when procurement is subject to disruption risk. We argue that features of the production process that are commonly encountered in practice (including differential production technologies and financial constraints) may result in the formation of inefficient supply chains, owing to the misalignment of the sourcing incentives of firms at different tiers. Our analysis highlights that a focus on optimizing procurement decisions in each tier of the supply chain in isolation may not be sufficient for mitigating risks at an aggregate level.