EFFECT OF DISRUPTION RISK ON A SUPPLY CHAIN WITH PRICE-DEPENDENT DEMAND

Abstract

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 disrup-tion correlation affects the supply chain members’ profits in a nonmonotonic way. In a scenario of responsive pricing scheme, i.e., the retailer chooses sell-ing price after the suppliers’ disruption is resolved, we show that when the suppliers’ disruption correlation becomes stronger, the suppliers’ profit will de-crease 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.