Supply chain coordination in a dual sourcing system under the Tailored Base-Surge policy

In this paper, we study the coordination of a dual sourcing supply chain comprising a buyer and two suppliers: a regular and an expedited one. The suppliers differ in lead time and cost, with the expedited supplier offering a shorter lead time at a higher cost than the regular supplier. The buyer uses the Tailored Base-Surge inventory policy, ordering every period a fixed quantity from the regular supplier and using the expedited supplier to meet any excess demand. We employ a novel perspective by assuming that each of the three firms is an independent party optimizing its profit function. We consider two scenarios: in the first scenario, the expedited supplier acts as a spot market, resulting in a two-players game between the buyer and regular supplier. The second scenario considers a three-players game. We derive the conditions for coordination for both scenarios, which we refer to as single and double coordination, and explore the impact of various parameters on the games and coordination. Our findings reveal that in the two-players scenario, regular orders increase with the spot market price, with a greater increase under coordination. Meanwhile, in the three-players scenario, equilibrium can only be sustained by increasing the order quantity from the expedited supplier in case its sourcing cost increases. Moreover, the regular supplier has an incentive to raise its price, whereas the expedited supplier charges a fixed price to the buyer. However, coordination results in the buyer placing fewer expedited orders. We demonstrate that the regular supplier sets its price just below the expedited supplier’s price. In contrast, the expedited supplier acts more aggressively in setting its price to either eliminate the regular supplier or charge the maximum possible price.