Disruption and Strategic Outsourcing to the Competitor in the Common Market

Disruption and Strategic Outsourcing to the Competitor in the Common Market

Zhaoqiong Qin (University of Central Oklahoma, Edmond, USA)
DOI: 10.4018/IJORIS.2019010101

Abstract

There are circumstances that one firm will outsource (purchase) products to its competitor in the common market when experiencing an unexpected supply disruption. Such strategies to hedge against the unexpected supply disruption commonly suffers from the higher wholesale price charged by its competitor although it helps maintain its presence on the market. Its competitor also is concerned about encroachment to sell the products to the firm as a rival in the common market. Mathematical models are formulated to maximize each party's profit in both cases of outsourcing and not outsourcing under decentralization and centralization. The results show that both parties benefit from the strategy of outsourcing at the time of disruption. More interestingly, the results also show that the competitor's centralized decision-making is preferred.
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Introduction

With the increase of offshoring, globalization and demand uncertainty, supply shortage and disruption risk have become the pressing issues in supply chains. These kinds of issues have become more severe following external factors (for instance, natural disasters), or internal factors (e.g., machine breakdowns). The typical examples are automotive manufacturers after March 11, 2011 Tohoku earthquake off the eastern coast of Japan – Over 400 parts in Toyota were in immediate shortage and production capacity was reduced for 6 months following the disaster (Tabuchi, 2011). Moreover, a recent explosion at the production plant of Evonik, a big supplier of a specialty resin for auto parts in Germany, led to significant inventory shortfalls (Bennett and Hromadko, 2012). Similarly, the flooding in Thailand hurt the supply of disk drives and related components from Intel (Clark, 2012b). Samsung mitigated the supply shortage through outsourcing the Galaxy S4’s processor to its rival chipmaker Qualcomm in several countries when it couldn’t produce enough of its own Exynos 5 Octa processor (Nguyen, 2013). Clearly, outsourcing products to competitors can mitigate the supply shortage and disruption risk.

Outsourcing products to competitors is in fashion in many industries. For example, Ford Probe is produced by Mazda Motor Co. and then competes against MX-6 in the sports car market; Zenith Electronics builds laptop PCs for Hewlett-Packard; and Lockheed produces parts for Boeing's commercial aircraft (Spiegel, 1993). Apparently, these outsourcing strategies directly affect the profits of the sourcing companies and their competitors. When companies face the supply shortage and disruption risk, whether they would outsource products to their competitors and competitors would provide products to help hedge against the disruption or shortage should be evaluated. So far previous research has shed little light on the strategies of outsourcing to competitors in the common market to hedge against the supply shortage or disruption risk. We aim to fill this gap in the literature.

In this study, there are two firms Firm 1 and Firm 2 to deliver the perfect substitutable products to the common market. Firm 1 is steady with enough capacity while Firm 2 may experience unexpected supply disruption. When the potential disruptive firm experiences the unexpected supply disruption, it can choose either to purchase the products from Firm 1 to still maintain its presence on the market or not to purchase and just to be absent from the market. We build mathematical models to study the steady firm’s incentives to choose its supply chain structure (centralized or decentralized) and the potential disruptive firm’s strategic outsourcing decisions (outsourcing or not) at the time of disruption. We examine how the steady firm’s supply chain structure and the potential disruptive firm’s outsourcing strategies affect both firms’ performance in the presence of the disruption riskIJORIS.2019010101.m01. Based on the firms’ performance, how should the steady firm make the decision in its supply chain structure and the potential disruptive firm make the decision in outsourcing? Specifically, we consider two competitors in the common market. They involve in the Cournot competition with perfect substitutability. Firm 2 faces the unexpected supply disruption risk while Firm 1 has ample steady supply. When supply disruption occurs, Firm 1 can choose whether to outsource products from its competitor to beat the supply shortage based on the sourcing agreement between them or not to outsource and be absent from the market. The objective of these two competitors is to maximize their own profits. We try to answer the following research questions: 1) Will it purchase the products from Firm 1 when Firm 2 experiences the disruption? 2) How will Firm 1 make the decision in its supply chain structure, centralized decision making by selling its products to the market directly on its own or decentralized decision making by selling through an independent retailer?

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