Impact of disruption risk at different supplier tiers

This article aims to study the impacts of disruption risk at different supplier tiers on the performance of both centralized and decentralized supply chains. We consider a three-tier supply chain, containing a tier-0 firm (original equipment manufacturer [OEM]), two potential tier-1 suppliers, and two potential tier-2 suppliers. Either a tier-1 or a tier-2 supplier is susceptible to disruption risk. We solve and analyze the optimal/equilibrium sourcing strategy and production quantities and compare the resulting supply chain network structures and the profits. Our results show that without fixed sourcing cost (and so each firm adopts dual sourcing and the resulting supply chain network is complete), the centralized supply chain suffers a greater profit loss when facing disruption risk at tier-1 suppliers than at tier-2 suppliers. Interestingly, this result reverses in the decentralized supply chain if the disruption risk is high. When fixed sourcing costs are present, the centralized system is less inclined to source from an unreliable tier-1 firm than from an unreliable tier-2 firm. In the decentralized supply chain, with the increase of fixed sourcing cost, the OEM’s sourcing strategy changes from dual sourcing to single sourcing when a tier-1 supplier is unreliable; surprisingly, the OEM may switch from single sourcing back to dual sourcing when a tier-2 supplier is unreliable because of the change in tier-1 suppliers’ sourcing strategy. Our results offer some guidance for firms on their risk mitigation strategies in their supply chains and provide insights into the impact of disruption risk on the supply chain structure.