Dual sourcing under quality improvement uncertainty

In modern manufacturing, the implementation of dual or multi-sourcing strategies presents challenges concerning the variability in component quality. This study investigates a supply chain where a manufacturer sources components from an incumbent and an entrant supplier, with the latter having lower quality but meeting standards. The entrant aims to enhance quality through research and development (R&D) efforts, which may succeed or fail. Failure in R&D leads the manufacturer to either limit the high-quality component use from the incumbent, offer consistent but lower-performance products in one market, or sell distinct products in two separate markets. We formulate the problem as a two-stage game within defined market structures (single- or two-market) and derive equilibrium solutions for both models. Our findings reveal interesting managerial insights. In both market structures, we surprisingly find that an increase in the likelihood of success for the entrant supplier’s R&D may negatively impact the entrant supplier while benefiting the manufacturer and the other supplier. Dual sourcing is beneficial to the manufacturer in general, except when the entrant supplier is highly uncompetitive in quality. Furthermore, we derive analytical conditions that dictate when each member of the supply chain favors either the single-market model or the two-market model over the other.