Supply Uncertainty and Chain-to-Chain Competition

I just found the first supply chain risk related paper from a professor (Biying Shou) of one of my alma maters: The City University of Hong Kong, and I think this a good time to have a look at his work. The complete article of today can be downloaded from the SSRN.

Research Question and method

For several years now researchers predicted, that in the future supply chains compete, not companies. And there has been some research on the topic, but the larger focus is still very much on single supply chains or even only elements of the chain. The authors’ goal is to analyze this broader situation, in combination with supply uncertainty.
They therefore establish a mathematical model of two simple supply “chains” containing one customers, who is served by two supply chains consisting of a retailer and a supplier each (see figure 1).

Figure 1: Model of the two competing Supply Chains (Shou et al., 2009)

Results

You can have a look at the detailed results directly in the paper. Here I just highlight the major findings. The authors analyze the decision on three different levels:

1. Operational level: “At the operational level, we show that a retailer should order more (less) if its competing retailer has a less (more) reliable supply.”
2. Design level: The authors define two possible contracts between supplier and retailer and show that a wholesale price contract is inferior to a revenue sharing model, since the former cannot coordinate the supply chain (see figure 2). Coordination of the supply chain means that all participants of the supply chain actually participate at the supply chain; this would not be the case if e.g. the supplier has a negative profit.
3. Strategic level: The authors test different competition models to ensure coordination of the supply chain and find: “… that supply chain coordination is always a dominant strategy under supply uncertainty and chain-to-chain competition.”

Conclusion

I was first confused about the naming of the different levels of analysis, and I still think they should be renamed. What is the difference between design and strategic level? What decisions are included in the Operational Level?
But the authors do a great job of analyzing several aspects of this double supply chain, on the “operational” level at the retailer only, on the “design” level between the retailer and the supplier and on the “strategic” level between the chains.
This article is also a great source for some more insights into micro-economics and game theory.