Multi-sourcing and information sharing under competition and supply uncertainty

We study multi-sourcing and vertical information sharing (VIS) in a supply chain (SC), consisting of multiple suppliers with correlated supply uncertainty and two competing retailers with demand signal. The upstream and downstream SC members form a Stackelberg game, with the retailers being the leaders. The retailers engage in Cournot competition, while suppliers engage in Bertrand competition. We first study the incentive of VIS for retailers and find that retailers would not share information with suppliers for free. However, under side-payment contract, two possible equilibriums exist depending on whether it is complete VIS. Complete VIS approximates Pareto-optimality when retailers have accurate forecasts. If supplier correlation is high and the number of suppliers is large, suppliers would opt for low side-payment and expect higher forecast accuracy. When facing high supply uncertainty, the suppliers would seek lower side-payment and allow higher forecast error. Next, we examine the tradeoff between risk diversification effect (RDE) and price competition effect (PCE) facing retailers under different VIS strategies. We find if the number of suppliers is large and supplier correlation is low, then the retailers’ gain on RDE will exceed the loss on PCE. Same observation can be found when supplier number is low, retailers do not VIS, and supply uncertainty and forecast error meet certain conditions. Under VIS, retailers would choose highly-correlated suppliers to outsource. Subsequently, we derive the optimal strategy for the joint multi-sourcing and VIS scenario. Finally, numerical study is conducted to validate our models and derive managerial insights to enhance SC performance.