Impact of Unreliable Supplier on a Supply Chain with Demand-Generating Marketing

Abstract

A firm often has multiple sourcing options for its product. Some suppliers may have longer lead times but offer lower prices, whereas reliable suppliers with quick-response capabilities may have higher prices. Purchasing from a cheaper, less reliable supplier can help a firm lower its inventory cost but will expose itself to potential risks. This paper analyzes a supply chain in which a manufacturer can source from a cheaper, less reliable supplier with a long lead time and/or a reliable quick-response supplier. The manufacturer also has to make demand-generating marketing investments before the selling season. Our analysis shows that if the unreliable supplier’s reliability is low, the reliable supplier will charge a low wholesale price; otherwise, it will choose a high wholesale price. As the unreliable supplier’s reliability improves, the manufacturer is inclined to increase its marketing investment, but there is a drop at some critical threshold. Interestingly, the existence of an unreliable supplier can lead to a win–win outcome for the reliable supplier and the manufacturer. The unreliable supplier’s reliability has nonmonotonic effects on the equilibrium profits of the reliable supplier and the manufacturer.